Q: I read somewhere that if you make two mortgage payments per month, you can shorten your mortgage by 6 to 10 years.
We currently have a 30-year fixed rate at 7.37 percent. We have lived here for approximately 8 years and I have always made one extra house payment a year by dividing the monthly payment by 12 and adding that to the principal each month.
In addition to this, should I sign up for the “bi-saver” program I read about? Our current balance is $95,000. We would be billed $1 every time the mortgage payment is deducted from our account.
We’re in our late 40s and would like to have the house paid off before we retire.
A: I ran your numbers on the prepayment calculator at Homeowners.com. Assuming your original loan was $130,000, at 7.37 percent, your monthly payment was about $897. Prepaying your loan $75 per month (about 1/12 of your monthly payment), shaves your 30-year loan by 6 years, 7 months. In other words, your loan is now just 23 1/2 years loan.
The good news is without doing anything else, you’ll save $50,000 in interest payments over the life of your loan. If you had increased your prepayment to $150 per month (or, 2/12 of your mortgage payment), which would have been 2 extra payments per year, you’d shave a total of 10 1/2 years off your loan, resulting in paying off your mortgage in 19 1/2 years. Over all, you’d save $77,000 in interest.
As you can see, there are plenty of benefits to prepaying your loan. If you want to go with the bi-saver program, and it will cost you just $1 per transaction, and if you’re not committed to it for the life of the loan (i.e., you can decide to stop at any point in time), then go for it. But be sure to have the lender deduct an extra $37.50 per month (half of the $75 you’re already prepaying on your mortgage) along with half of your regular payment.
The end result is that you’ll be paying an extra $75 per month, but you’ll also benefit because the money will get into your account sooner, bringing added savings.
The only time I’m against bi-saver type programs is when they charge you a fee to start it up (which sometimes runs as high as $500) and if you can’t stop the program at will. I also don’t like it when 3rd party companies offer bi-saver programs, but then keep the money (and the float) until the end of the month. With these programs, you don’t get the full benefit of what you’re trying to do.
Many lenders are now setting up auto-debit systems, which allows you to prepay yourself, electronically, for nothing, at least once a month, and sometimes more. Check with your lender for details.