• Mar 30, 2018 Paying extra on a mortgage saves big bucks
    Gary Sandler
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    Published 30 March 2018

    According to a new study published in the Journal of Financial Economics, 20 percent of homeowners who could have benefited from refinancing chose not to and lost out on $5.4 billion in interest savings.

    While refinancing may be advantageous for some, it may not be possible or cost effective for others. For those fitting the latter description, there are easy and inexpensive ways to reduce interest costs and shorten one’s loan term without refinancing.

    In a nutshell, the idea is to both accelerate the pay-down of your mortgage balance and shorten your loan term by paying a little extra each month. The question is how to best accomplish the task. One option is to take advantage of your lender’s biweekly payment plan, if they offer one. Another is to simply do it yourself.

    In the traditional mortgage scenario, borrowers make their scheduled house payment of principal, interest, taxes and insurance (PITI) each month, year-after-year, until the loan is paid in full. With the biweekly option, borrowers make half a mortgage payment every two weeks. Here’s an example of how the scenario plays out at today’s rates. The effect is even more dramatic when applied to higher rates.

    The monthly principal and interest payment (P&I) for a $150,000 loan financed over 30 years at 4.75 percent interest is calculated to be $782 per month. The biweekly payment on the same mortgage amounts to half of the scheduled payment, or $391 every two weeks. In the traditional scenario, borrowers make 12 equal monthly payments of PITI each year. With the biweekly option, borrowers make 26 equal half-payments (every other week for 52 weeks) for a total of 13 full payments each year. The best result is realized when the half-payments are based on the full monthly PITI.

    The whole idea here is to reduce the amount of mortgage interest a borrower pays by accelerating the reduction of the principal portion of the loan. While lenders and third-party providers charge borrowers between $195 and $700 to sign up for their biweekly programs, you and I have the ability to realize similar savings without having to pay for the privilege. How? By utilizing the do-it-yourself technique.

    As the accompanying chart reveals, borrowers who choose their lender’s biweekly option and pay on their $150,000 loans until they are paid in full save over $23,000 in interest over the life of the loan. Making biweekly payments also shortens their loan term by 5.5 years.

    You and I can accomplish roughly the same savings by simply making the equivalent of one extra PITI payment per year. In our $150,000 scenario, that equals around $60 per month (without adding in the taxes and insurance), or $782 extra annually. I’ve been adding additional principal payments to my regular mortgage payments for years now and the results have been amazing, to say the least.

    Adding an extra $100 to $150 per month to the monthly payment in our $150,000 scenario produces an even more impressive result, saving our fictitious borrower between $32,000 and $42,000, respectively, in interest charges over the life of the loan, while at the same time knocking between 6 and 9 years respectively off the original 30-year term. Don’t have the extra bucks to add $100 to $150 to your monthly payment?Use your income tax refund and pay the extra in a lump sum. The result is almost identical.

    Now for the fine print: It’s important that borrowers check the terms of their mortgage to make sure they aren’t charged a prepayment penalty when adding additional principal payments to their loans. Borrowers should also be wary of third-party vendors who offer biweekly payment plans.

    For a fee, they’ll take your money and forward the payment to your lender on your behalf. This may be problematic for two reasons: One, if you’re going to mail a payment to someone, mail it directly to your lender and avoid the fee altogether. Two, what happens if the third-party vendor takes your money but doesn’t forward it to your lender on time — or at all?

    Well, there you have it. Adding a little extra cash to your mortgage payment each month can reap substantial benefits and can be accomplished without having to pay for the privilege.

    See you at closing.

    Gary Sandler has been a real estate broker for over 40 years and is the owner and qualifying broker of Gary Sandler Inc., Realtors. Sandler has been reporting on local, statewide and national real estate trends for more than 15 years, and was twice named Talk Show Host of the Year by the NMBA and the Associated Press. He can be reached at 575-525-2400 or gary@garysandler.com.

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      Gary Sandler