“You’ve got to do your own growing, no matter how tall your grandfather was.” – Irish proverb
I received a notice last week from a “mortgage service corporation.” They told me that by switching to twice-monthly mortgage payments, I could ultimately save tens of thousands, perhaps hundreds of thousands, of dollars. And the best part? It would only cost me a one-time “non-refundable” processing fee of $195 for them to set it up for me.
I immediately threw it in the trash.
Today, I got a competing offer. No upfront fee. This one would charge me a service fee of $4.95 a month for handling “the paperwork” of converting my monthly mortgage. This offer was worse than the previous one.
It’s not that companies like these aren’t telling the truth. They are. You can save a tremendous amount of money by paying off your mortgage this way (for reasons I’ll explain in a moment).
I dumped their notices because (1) I’m already using a version of this mortgage-saving strategy and (2) I didn’t need them or anyone else to set it up.
I set it up myself a few years ago with a single five-minute phone call, at no charge. And, chances are, you can do the same thing.
Here’s how “mortgage-reduction programs” work. Each year, you pay a little more than you normally would on your mortgage payments. That extra bit goes toward principal (that is, your outstanding loan balance). Since you’re reducing the amount of the loan balance more quickly, you’re reducing the amount of interest you’re charged.
It’s that simple, but also very powerful.
For instance, let’s say you just took out a $150,000 mortgage at a fixed rate of 6% for 30 years. Your monthly principal and interest payments (your mortgage payments) on a loan like this will be about $899. If you make those payments every month for 30 years, you’ll end up paying a total of $323,757. Of that amount, $150,000 will have been principal. The rest, or $173,757, will have been interest.
But if you pay just a little bit more each month, you can save a great deal.
For instance, let’s say you pay in an extra $75 each month. Over 12 months, you’re paying an extra $900 — which is equivalent to one extra monthly mortgage payment.
Now, instead of paying your loan off in 30 years, you’ll pay it all off in about 24-1/2 years. The total of all your principal payments will still be $150,000. (You always have to pay back at least what you borrow.) But the total of all your interest payments will now be only $136,935. So, you’ll end up paying a total of just $286,935 on your loan — a $36,822 savings off the amount you would have paid over the full 30 years! And you own the property free and clear more than five years earlier.
Another way to do basically the same thing is to simply make “half-payments” every two weeks. Instead of sending in a check for $899 on the first of every month, you send in a check for $449.50 every other Monday. This way, you’re also making the equivalent of an extra monthly mortgage payment each year. Why? Because there are 52 weeks in the year. And by making payments every other week, you end up making 26 half-payments — which is the same as making 13 full monthly payments.
Either way, you’re going to save in the neighborhood of $37,000 over the course of your mortgage by regularly paying in just a little bit more. So how do you set it up? Usually, it’s as simple as making a phone call to the holder of your loan.
The great majority of residential mortgages in the U.S. have no prepayment penalty. Check your mortgage loan docs for a section titled something like “Borrower’s Right to Prepay.” In it, you should find that you have the right to make a full or partial prepayment of principal without any prepayment charge. It usually just requires you to notify the note holder in writing that you’re prepaying principal. That written notification can be as simple as making a note in the memo line of your check that says “additional $75 toward principal.”
Even if the bank that loaned you the money to buy your house has sold the note to a different company (which often happens), the new note holder is still bound by the terms of the original loan. And if the original loan doc says there’s no prepayment penalty, you should be able to add money toward the principal as often as — and to the extent that — you want. Maybe you want to add more than the equivalent of one monthly payment a year. Maybe you want to add the equivalent of two or three monthly payments and pay the loan off even sooner and save even more money. That is up to you.
The best way to do this, in my opinion, is to set up an auto-payment system for your mortgage. Call the holder of your loan and ask them to automatically withdraw the mortgage payments from your checking account each month. You can tell them to make that withdrawal 10% or 15% (or whatever percentage you choose) more than your regularly scheduled monthly payment.
Most banks, in my experience, will do this at no charge. This will not only help you build equity more quickly and save thousands in interest payments but also — as an added bonus — could help strengthen your credit rating. And you can make it happen in just a few minutes, without having to pay someone else a few hundred dollars to do it for you.