A mortgage is often the biggest debt you’ll take on in your life. When considering a mortgage, many people usually focus on two aspects—the total mortgage amount and their monthly payments. However, another key element to consider is the total amount of interest you’ll pay over the life of the loan. This is an important factor that, along with the mortgage amount, determines your total cost of homeownership.
Let’s illustrate this with an example. Steve and Jen purchase a home for $350,000. They provide a down payment of $70,000 and secure a 30-year mortgage at a 4% fixed interest rate for the balance of $280,000. Their monthly payments amount to $1,336.76, a figure they feel they can manage. After faithfully paying for 30 years, their home is fully paid off. Yet they’re surprised to discover that they paid back $481,234.62, which includes $201,234.62 in interest alone.
Conversely, if they opted for a 15-year mortgage with the same terms, their overall financial situation would improve. Their monthly payments would increase to $2,071.13, but by the end of 15 years, they’d only pay a total of $372,802.71, which includes just $92,802.71 in interest.
These scenarios highlight the significance of the interest repayment – an aspect often overlooked. Most people, once aware of the interest they’re paying, are eager to reduce it. One simple method to achieve this is to make biweekly mortgage payments instead of monthly.
Advantages of Bi-weekly Payments:
1. Effortlessly make an extra mortgage payment each year. Paying biweekly results in 26 payments a year (the equivalent of 13 monthly payments). Although it doesn’t seem like much, this extra annual payment can notably reduce your mortgage balance.
2. Lower the overall interest. Returning to Steve and Jen’s scenario, if they switched to biweekly payments on their 30-year mortgage, they’d end up paying $169,820.69 in interest—saving a total of $31,413.93!
3. Complete repayment sooner. Along with the substantial interest saving, biweekly payments would shorten their mortgage term by 49 months. From a 30 year term, they’d now repay in just under 25 years and 11 months. For a 15-year mortgage, they’d be debt-free 18 months earlier, reducing the loan term to 13.5 years.
While many banks offer biweekly payment options for a fee, it’s often unnecessary unless you struggle with self-discipline, or if your mortgage agreement doesn’t allow additional payments. If neither is an issue, simply set up biweekly payments yourself and watch your mortgage years melt away!
Image Source: homebuilder-guide.com
