We all pay the same amount for our home loan each month, so why not try this idea that allows you to continue to pay the same amount, but saves you thousands of dollars on your mortgage? It is a very simple concept, but it has a powerful result. A two week pay check is the norm for most people. If you are like most people, as soon as you are first paid, you spend a lot because the cash is there, but cash gets tight towards the end of the pay period. But yet, our expenses are fairly stable from month to month.
The reason for this phenomena is that we pay the bills and spend extra e have the the money, and when we don’t, some things don’t get paid. The answer to this problem is to budget our funds, and one of the most valuable and easiest ways to do this is to pay your home loan every two weeks instead of once a month. This is an easy idea that will save the home owner a great deal of money, and have the added benefit of paying off the mortgage sooner. Let us use a case of an $80,000 fixed, 30 yr, 7% mortgage-about $25,000 can be saved on such a mortgage using this system.
How to pull this off- budget your mortgage payment out of each paycheck instead of the last one of the month. (Most people use the second pay of the month to pay the mortgage since it will get to the bank by the first of the month.) When you pay one half of your home loan two weeks earlier, the effect accumulates, and your mortgage is paid off ahead of time. Because of this, your total interest bill is less.
Because of the way mortgage interest is calculated and paid down, most of your early mortgage payments are allocated to pay interest, and only a small portion goes to principal. So you mostly pay interest, at least at the outset of the loan. Once you increase the frequency of payments, the interest is reduced faster and the principal begins to be paid off. In this way, the principal will be paid down earlier.
Your bank may have a special form for this type of operation, but even if they don’t, just send your money in with your mortgage number clearly indicated on it. You can also make copies of your payment forms and just change the month it is meant for.
As you can observe, without any effect on the total impact on your monthly expenses, you have found the magic recipe for saving tons of interest and paying your home loan down ahead of time.