30 Year Mortgage in 25 Years

Here’s a look at my guest post on Ramit’s site I Will Teach You to Be Rich.  We’ve all heard it before…time value of money… blah, blah, blah. So, let’s see some real world examples of how you can save money on your biggest ticket item…housing.

Instead of paying off your mortgage once per month, set up a system to pay it twice per month. I’m not telling you to double your payments. I’m saying that paying every two weeks WILL mean several years less of payments and

Here’s how it works with Bank of America [Countrywide] and I’m assuming it works this way with others. BofA has a plan PayPlan/26 which means instead of making 12 payments a year you are paying 26 payments a year. Note the math. It seems like you should be paying 24 payments a year, but that’s not how the calendar works, so you make extra payments. But, that’s a good thing. It’s like you are making 13 payments a year [the way BofA does it, more on this below*] Let’s take a look.

Scenario 1: Typical Mortgage

APR: 6%, $300K, 12 annual payments of $1798.65, total interest paid over 30 years, $347,514.57

Scenario 2: Making an extra payment each year

APR: 6%, $300K,? 26 bi-weekly payments of $899.38, total interest paid over 25 years, $276,591

You just saved almost $71,000 in interest payments. Wow, that’s like 18,000 lattes or one every day for the next 50 years.

What’s happens if you have bad credit and have higher interest rates than 6%. Moving to every two weeks helps even more. At a 7% interest rate, you will shorten your loan by 6 years instead of 5 years for the 6% rate. Better yet, you save from paying $98,545 in interest.

Scenario 3: Making extra payments each month

Okay, this doesn’t save you a lot more, but you stop payments 5 months sooner and your interest payout is $273,852 for an extra savings of $2739.

The problem with the scenarios above is unless they are automated, most of us will never do it. That’s why the Bank ofAmerica PayPlan/26 plan is great. It’s set it and forget it.

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