Splitting the Payments on Your Mortgage

Taking your payments and making them into smaller payments can also help to decrease your mortgage loan dramatically. The idea is to create, again, extra payments per year which would decrease your loan amount quicker so that you are charged less interest.

If you pay on a mortgage of $150,000; 6.25% interest at a payment of $923.58 each month you would pay about $11,082 for the year. Now, let’s take that payment of $923 and cut it in half. Your payment would then be 461.79 and instead of monthly payments you pay by every other week which will pay about $12,006 for the year. That is almost $1,000 more for the year. This extra money you will have paid has not changed your lifestyle much but will make a huge impact on how long you will be paying on you loan and how much interest you will save yourself. If you did payments of $461 every other week you would pay the loan off in 24 ½ years.

Let’s now consider taking the payment of $923 and cutting it into four equal payments of 230.90 and we pay the home loan each week, not every other week but each week. You will end the year paying about $12,006 just like the example of the payments every other week but the time it would take to pay off your loan would be a little under 22 years.

The reason paying your payments every other week or every week works is two fold. One, you pay more during the year than you would normally pay just paying once a month which knocks down your loan quickly and helps keep the interest charged to you down. The second way paying weekly works is the interest you pay on can only accrue for about 1 week then the interest is paid off and has to start accruing again.

Interest is added exponentially to itself each day. And if we stop its growth each week we end up paying less. Let me explain. I am going to use exaggerated numbers to help make the point. Suppose you have a loan of $15,000 which you are to pay over 30 years. Your interest rate is 6.25% and your payment is $92 each month which $80 is just interest. The day you start your loan your interest would be $0.00 then after the first week the interest owed is now $10 and after the second week you would have interest of $35, a $15 increase, third week let’s say the interest is $55 and the fourth week you owe $80, a $25 increase. If you notice in the example the loan gains another $5 dollars a week in interest from the week before. If, in the example you paid once a week you would pay $10 dollars a week or $40 dollars in interest instead of $80 and the other $40 dollars paid would go to pay down your loan. Real loans do not work this easy but the idea is the same and interest gained and lossed is less.

Pros: Your loan is paid down. Interest is saved.

Cons: It may be difficult to find the extra money. Unless the payment is drawn each week money management will be an important part of paying the payments on time and it may be difficult to find a lender that will allow this type of loan structure. The lenders allowing weekly and bi-weekly payments are very few.