The following is from the Introduction to the forthcoming second edition of Mortgage Free!: Innovative Strategies for Debt-free Home Ownership by Rob Roy.
Maybe you decide that building a house is not for you. Well, here’s a tip, suggested by Bob Duquette of Adirondack Funding Services of Plattsburgh, New York, that can save you nine years of payments (and $41,500 in the example given) on a thirty-year mortgage, or two and one-half years on a fifteen-year loan. It’s something you can do right now, and it is practically painless. At least, you won’t notice the pain. This mathemagical strategy involves making biweekly mortgage payments instead of monthly payments. And the biweekly payments are exactly half of what you would pay by the month. There, isn’t that easy?
“But how can that save me time and money?” you ask. The trick is that you are making twenty-six half payments in a year instead of twelve full payments. This is like making an extra full payment a year. As we’ve already seen, prepayment of your mortgage is the best investment you can make. In 1995, the typical conversion cost of refinancing your mortgage along these lines was about $295. In an article by Joe LoTemplio (Plattsburgh Press-Republican, May 21, 1995), Duquette says that about three-quarters of the people who learn about the biweekly payment scheme go for it. He says, “The nice thing about it is that it doesn’t interrupt your cash flow and you don’t have to come up with that large amount once a month.”
Original Mortgage: $70,000 at 8.5%, 30 years, monthly payments of $688.24 (payments include $150 per month escrow for property taxes and insurance)
Loan Curtailment Strategy: convert to biweekly payments of $344.12
Interest on the original loan: $122,774
Interest if biweekly schedule is used: $81,268 ($41,506 saved!)
|Year End||Principal, Original||Principal, Biweekly|
In a slight departure from this strategy, a correspondent reported that after eighteen months of regular mortgage payments, he switched to bi-weekly payments and added an extra $50 towards the principal with each payment. He said, “It was very simple, effective and automatic, as the payments were pre-authorized.” He lopped a full thirteen years off his mortgage.
For more strategies to be mortgage-free, see Mortgage Free!: Innovative Strategies for Debt-free Home Ownership by Rob Roy.