Marcom Today – Financial Services Article, “Mortgage Hacks”

Three Ways to Save Money Over the Life of Your Loan

By now you’ve probably seen the Facebook reels or TikTok videos where someone whispers a secret to saving thousands of dollars across the life of your mortgage by using, “This simple mortgage hack.”

If you stick around and watch the entire video, they’ll probably explain the “bi-monthly payment” or “every two weeks” mortgage payment method. Though they may sound the same, they aren’t, and depending on your financial situation, they may not be the best “hack” for paying much less interest throughout your loan.

Before we look at a third option, let’s take a look at the bi-monthly and every two-week methods.

Bi-monthly Mortgage Payment Method

Paying twice each month, means you’re making a total of 24 payments each year, rather than 12. If all you do is split your regular payment into two equal payments and pay them on say, the 1st and 15th of the month, you’re not saving any money. And anyone who says you are isn’t telling the truth. This method doesn’t impact your interest rate, and you’re not putting any additional money toward your principal, which is the only way to reduce your total payments over the life of your loan unless you refinance.

That said, be careful with refinancing. The interest rate may be lower, but if you are refinancing for another 30 years (or refinancing for the same amount of years as your original loan), then you’re probably going to lose money in the long run, particularly once you factor in Closing Costs. More on this later. Just…beware of refinancing offers that sound too good to be true.

Every Two Weeks Mortgage Payment Method

When you pay half your mortgage every two weeks, because of the number of extra days in some months (and fewer in February), you will end up making 26 payments each year versus 24 as with the Bi-monthly method. This means that if you have a 30-year mortgage, in five years, you will have made five extra payments.

Over the course of 30 years, you will have made nearly 30 extra payments, which will certainly reduce both the interest you pay over the life of the mortgage and how many months you have to pay on it.

Sample Mortgage Savings Scenario:

Let’s say for simplicity, your mortgage is $100,000 financed for 30 years (360 months) at a 3.25 interest rate.

Paying once per month, and paying no extra will cost you $56,674.21 in interest over 30 years.

Making bi-weekly payments, and paying no extra will cost you $48,757.29 for a total savings of $7,916.92.

As you can see, the Every Two Weeks method does save you money, but keep in mind its success depends on you consistently paying twice each month for more than two decades. That’s a lot of reminders!

Does this impact my taxes?

Depending on your tax bracket, you may not realize the same amount of tax savings over 30 years simply because, as your loan matures, you may claim less money in mortgage interest payments on your annual tax return. This negate your total savings (interest savings – reduced tax savings) since you won’t be able to claim the same amount of deductible interest each year your loan matures.

But saved money is saved money. Whether it’s better for you to save it now, or save it as you inch closer to retirement, is a discussion best left to your specific family and whoever makes these financial situations with you. However, for those in higher tax brackets, as the tax code is written currently, you may not be able to deduct any of your mortgage interest anyway, so for these earners, it’s a wash.

In the scenario where you aren’t making any additional principal paymnts each time you pay (no matter how often you pay), only the “Every two weeks” method saves you money.

There is a way to increase your savings over the life of your mortgage using either of these methods, and that is to pay more each payment on your principal. In effect, this reduces the total amount of money you’re paying interest on each month, resulting in a lower total interest calculation from month to month. This is the ONLY way that the Bi-Monthly Payment method will save you money, but if this is something you can afford to do, then I have a better way!

Paying Down Your Mortgage Principal

If your financial situation allows it, even if it’s not until years into your mortgage, you should try and make extra payments towards your principal as frequently as possible. The great thing about this method is that it doesn’t require that you do anything different each month other than write your check, or send in your electronic debit, for a higher amount than usual.

But first, a caveat: Not all loans will allow you to pay extra on your principal, and some loans–not too many these days–penalize you for paying off your loan early, so be sure and consult your mortgage paperwork before using this method OR the “Every two weeks” payment method.

Even if you are unable to make a significant additional principal payment each month, if you can afford the Every Two Week method, then this is a simpler way to do it. All you do is divide your regular monthly principal payment (in our $100K/30-year scenario, it’s roughly $435.21 each month) by 12 ($36.27) and add that amount to your regular monthly payment. So, rather than paying $435.21 each month, you instead send in a payment for $471.48. Depending on your bank, they may automatically post any additional amount towards your principal, or you may need to send in a coupon/payment slip where you specify how to allocate the additional $36.27.

Doing this yields the same savings as the Every Two Week payment method, but it removes the hassle of trying to remember to make the payment and/or scheduling the extra payment.

If you can afford it, the more you can pay each month, or even just whenever you have some extra money to put towards it, will yield significant interest savings benefits over the life of your loan.

If you could afford to pay the equal to two additional payments each year ($72.54 additional each month) saves you more than $13,000 in interest over the life of your loan and you will pay off your mortgage six years earlier than if you’d just paid the minimum monthly payment.

With interest rates going up, it’s difficult to make any additional payments. But at least now you know which method will benefit you most, and which ones are not going to help you become mortgage-free any sooner. And remember, any additional amount you can pay towards your principal today will save you money over many tomorrows!