You and Your Mortgage
By Nikki Willhite
I have to admit I was "thrown for a loop" a few weeks ago. A
friend of mine sent me a tip for the Pennypincher. You may remember it. Her
family is paying their mortgage off quicker, with the same amount of money, by
making bimonthly payments, or cutting their payment in half and paying it every
I thought I had missed a "big one"! My first thought was that
making the payments more often reduced the interest, and this led to the
reduction in the time frame the mortgage would last.
It sort of made me ill, thinking that since my husband gets paid
every 2 weeks we could have done the same thing without paying any extra money.
I thought of all the money we might have wasted.
So I got on the telephone and began by calling my mortgage
company to see if they had that program. They did, and they were more than happy
to let me join- for a lifetime fee of about $400.
However, my next question clarified things. I asked them if the
reduction in the amount of time it would take to pay off the mortgage was
because the interest was being paid every 2 weeks, or was it because paying
every two weeks instead of once a month would result in one extra payment during
Much to my relief, it was the latter. The mortgage company does
not make payments on your mortgage twice a month. It just collects the money,
and then makes the one payment per month.
My next thought was that was a sneaky way to get you to let them
debit your bank account, but I tactfully refrained from that one.
Then I asked them why anyone would want to do that. What was the
difference between just sending in some extra money each month TO PRINCIPAL? The
answer was "Most people donít have the will power to do that".
Let me repeat- "Most people donít have the will power to do
that". I donít think thatís the true reason. I think it is that most people do
not understand the significance of sending in extra money to their mortgages,
especially at the beginning of a mortgage, and the impact it will have on the
longevity of the loan.
In the broadest of terms, just sending in one extra mortgage
payment per year (TO PRINCIPAL) can result in reducing a 30 year mortgage to a
23 year mortgage. If you look at the amortization table of your mortgage, you
will see that at the beginning of your loan you are paying only a handful of
dollars to the principal of your mortgage. The rest is all interest.
All you have to do to knock a month off your mortgage is to pay
the principal on the next payment due on your mortgage.
At the beginning of a mortgage, that is a small amount. Those
few dollars will reduce a whole month from your mortgage. That is why it is so
beneficial to do it at the beginning of your loan.
Many mortgage lenders to not give you this information. The good
ones do. When you get half way into your loan, you are paying about half
interest and half principal, and it is a lot harder to cut down the time.
If you donít have an amortization of your mortgage, go to one of
the software (shareware) download sites on the Internet and type in "mortgage".
Most of the software programs allow you to enter your data and print out your
These amortization pages show the principal and the interest of
each payment over the life of the loan. Some of the programs allow you to enter
in different figures and calculate how fast you could pay your mortgage off with
different amounts of money added to the principal each month.
Again, one of my favorite sayings is "Those who understand
interest collect it. Those who donít pay it". In my opinion, the "American
Dream" is not owning a big house with a large mortgage. The "American Dream" is
owning your own home, mortgage free.
Here are some other facts to consider about mortgages:
*You will always save money with the shortest mortgage you can
afford. The interest rate will be lower, and you will pay it back faster. This
will amount to thousands of dollars over the life of the mortgage.
*If you know you are going to stay in your home for several
years, it is worth paying a few points to bring down the interest rate. Always
ask your mortgage specialist for the "break even point" to determine if it will
save you money.
*Shop around for mortgages. There are many, many mortgage plans
available. 20-year fixed mortgages are now available, and can be a good
alternative to a 30- year mortgage if you canít make the payments on a 15-year
*Consider enlisting the services of a mortgage broker. They
represent dozens of companies, and will find you the best mortgages and rates.
There is no cost for their services, as they represent the mortgage companies.
*If you are purchasing a home because of a move to a new
location, you will have some tax advantages. Read the appropriate documents at
the IRS website, or consult a tax professional.
*Carefully consider the potential of adjustable rate mortgages.
If the interest rate rises, your payment could skyrocket.