To wipe out a loan, a borrower pays much more in interest than the principal that he borrowed. If someone tells you that you can save thousands of dollars in interest payments, and shorten the pay off by about eight years (in the case of a thirty year mortgage) it may sound like magic. Well, really it is not. The method is logical and simple, provided you have the required financial discipline. To avail of this advantage, you must shift from monthly payments to bi-weekly payments. Now, bi-weekly does not mean two payments a month. You make 26 payments in a year instead of 12 monthly disbursements. Each bi-weekly installment would be half the monthly payment. For instance, instead of a monthly payment of, say, $1000, you pay $500 every two weeks. This means that in place of $12,000 under the monthly scheme, you actually pay $13,000 in a year, or an extra payment of $500 half yearly. The lender must be instructed to credit this excess amount against the borrowed principal amount, and not towards interest. Strictly speaking, it is not essential to choose bi-weekly payment to gain this benefit. You could send a check for $500 half-yearly to the lender with due instructions. Or one-twelfth of the amount could be added to the monthly payment. But many people find these impractical and prefer bi-weekly method. $1000 per year may sound too small to make any perceptible impact, but it does and is easy as well. Your total interest burden is reduced considerably and your 30 years mortgage could be paid off in about 22 years. And your equity in the house increases quickly. There are service providers who handle bi-weekly payments for a fee. That assistance is not really necessary if you make a little effort. |
