RISMedia
  • News
  • Premier
  • Publications
  • Events
  • Education
  • Newsmakers
  • Power Broker
No Result
View All Result
  • Agents
  • Brokers
  • Teams
  • Marketing
  • Coaching
  • Technology
  • More
    • Headliners New
    • Luxury
    • Best Practices
    • Consumer
    • National
    • Our Editors
Join Premier
Sign In
RISMedia
  • News
  • Premier
  • Publications
  • Events
  • Education
  • Newsmakers
  • Power Broker
No Result
View All Result
RISMedia
No Result
View All Result

Alternative Ways to Pay Off Your Mortgage Early

Home Consumer
By Jack Guttentag
April 5, 2014
Reading Time: 3 mins read

mortgage_payment_concept(MCT)—A standard, fully amortizing mortgage pays off the balance over the term. With a 30-year term, this requires 360 monthly payments, while a 15-year term requires 180 payments. Many lenders, however, offer special loan repayment programs that promise to pay off the balance before term, without imposing much of an added burden on the borrower. Here are the most common of these schemes, as well as an alternative that borrowers can adopt on their own.

BIMONTHLY PAYMENT PLANS: On a bimonthly payment plan, the borrower’s monthly payment in split into two pieces of equal size, one due on the 15th of the month and the other on the first. While the borrower makes 24 payments a year instead of 12, they add to the same total. However, the lender credits the half-payment on the 15th to the balance on that day, which reduces the interest due on the first of the month.

While the reduction in interest shortens the period to payoff, the impact is small. On 30-year mortgages with rates of 6 percent or less, payoff occurs after 719 half-payments, shaving just one-half of a month off the term. On a 7 percent mortgage, payoff occurs after 718 half-payments, accelerating payoff by one month.

There isn’t anything wrong with the bimonthly mortgage, provided that paying twice a month is convenient and you don’t give up anything of value to get it. Readers have reported to me that loan officers touting the bimonthly have told them that the term would be reduced to 23 or 24 years, which is nonsense. You can check this out yourself with a spreadsheet on my website called “Extra Payments on Bimonthly Payment Fixed-Rate Mortgages.”

This spreadsheet also allows you to assess the impact of additional bimonthly payments, which some borrowers might find an attractive option. As an example, the borrower with a $200,000 mortgage at 4 percent who pays $477.42 twice a month gets to a zero balance just half a month early. But if the borrower rounds off the payment to $500, payoff occurs after 659 payments, or 30.5 months early.

BIWEEKLY PAYMENT PLANS: A biweekly mortgage is one on which the borrower makes a payment equal to half the monthly payment every two weeks. The payment amount on a biweekly is thus the same as that on a bimonthly. But since there are 26 biweekly periods in a year compared to 24 bimonthly periods, the biweekly produces the equivalent of one extra monthly payment every year.

This results in a significant shortening of the term. For example, the 4 percent, 30-year loan converted to a biweekly pays off in 310 months — or 25 years, 10 months. The reduction in payoff period is due entirely to the extra payment every year. Payments are credited monthly, not biweekly, so there is no intra-monthly interest savings comparable to that on a bimonthly.

There have been biweekly plans in which payments are credited biweekly rather than monthly, but they have been overpriced, and their advantage is small. In the example directly above, the payoff period would be 25 years 7 months, or 3 months less than when payments are credited monthly.

Note that the benefits of any extra payment program increase with the level of interest rates. Using the same example, the payoff period is 286 months at 7 percent compared to 310 months at 4 percent. All these numbers on biweeklies are drawn from another spreadsheet on my site titled Biweekly Mortgages.

ROLL YOUR OWN EXTRA PAYMENT PLANS: Borrowers who like the idea of accelerating the payoff need not pay extra for the privilege; they can do it themselves. By increasing their monthly payment by 1/12, they will pay off in about the same time as a standard biweekly. At 4 percent, payoff is one month later, while at 7 percent it is one month earlier.

The major difference between a plan administered by a lender and one administered by the borrower is that the first is mandatory, providing a discipline that some borrowers may value. Doing it yourself means that you don’t have to do it, which is an advantage to some but a drawback to others.

Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania. Comments and questions can be left at http://www.mtgprofessor.com.

©2014 Jack Guttentag
Distributed by MCT Information Services

ShareTweetShare
Susanne Dwyer

Susanne Dwyer

Related Posts

Building Relationships, Making Clients for Life
Agents

Building Relationships, Making Clients for Life

May 21, 2022
Court Calls for NAR to Provide Sitzer/Burnett Findings to Moerhl Plaintiffs
Agents

Court Calls for NAR to Provide Sitzer/Burnett Findings to Moerhl Plaintiffs

May 20, 2022
National Rents Hit Their 14th Straight Month of Record-Highs
Agents

National Rents Hit Their 14th Straight Month of Record-Highs

May 20, 2022
Registration Open for ‘NAR NXT, The REALTOR® Experience’ – the New Name of the Annual REALTORS® Conference & Expo
Agents

Registration Open for ‘NAR NXT, The REALTOR® Experience’ – the New Name of the Annual REALTORS® Conference & Expo

May 20, 2022
Effie Atsaves Promoted to LeadingRE Vice President, Marketing
Agents

Effie Atsaves Promoted to LeadingRE Vice President, Marketing

May 20, 2022
Fathom Realty Adds Four Members to Its New Regional Director Position
Agents

Fathom Realty Adds Four Members to Its New Regional Director Position

May 20, 2022

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Tip of the Day

Disrupter Roundup: A Beta-Way to Improve Your Social Strategy

The Playhouse app marries the recreational habit of Zillow surfing and TikTok scrolling to create an entertaining, short-form, home-viewing experience.... Read more.

Business Tip of the Day provided by
REGISTER NOW

Recent Posts

  • Building Relationships, Making Clients for Life
  • Court Calls for NAR to Provide Sitzer/Burnett Findings to Moerhl Plaintiffs
  • National Rents Hit Their 14th Straight Month of Record-Highs

Categories

  • Spotlights
  • Best Practices
  • Advice
  • Marketing
  • Technology
  • Social Media

The Most Important Real Estate News & Events

Click below to receive the latest real estate news and events directly to your inbox.

Sign Up
By signing up, you agree to our TOS and Privacy Policy.

About Blog Our Products Our Team Contact Advertise/Sponsor Media Kit Email Whitelist Terms & Policies

© 2022 RISMedia. All Rights Reserved. Design by Real Estate Webmasters.

No Result
View All Result
  • Home
  • Premier
  • News
    • Agents
    • Brokers
    • Teams
    • Consumer
    • Marketing
    • Coaching
    • Technology
    • Headliners New
    • Luxury
    • Best Practices
    • National
    • Our Editors
  • Publications
    • Real Estate Magazine
    • Past Issues
    • Custom Covers
  • Events
    • Upcoming Events
    • Podcasts
    • Event Coverage
  • Education
    • Get Licensed
    • REALTOR® Courses
    • Continuing Education
    • Luxury Designation
    • Real Estate Tools
  • Newsmakers
    • 2022 Newsmakers
    • 2021 Newsmakers
    • 2020 Newsmakers
    • 2019 Newsmakers
  • Power Broker
    • 2022 Power Broker
    • 2021 Power Broker
    • 2020 Power Broker
    • 2019 Power Broker
  • Join Premier
  • Sign In

© 2022 RISMedia. All Rights Reserved. Design by Real Estate Webmasters.