Q. Is there any difference from paying an extra bit each month or one full payment a year or bi-weekly payment to pay off the debt faster or easier? The problem I have with my bank is to pay bi-weekly, they want a full month’s payment in advance to set it up. Then I heard just divide the monthly payment into 12 months & pay that extra principal each month and it comes out the same? Is that true? Thanks for clarifying it for me
A. First, I want to commend you for trying to eliminate your mortgage debt early. Shortening the period even just a few years may not seem like much of a benefit now, but I will guarantee you that as you get closer to the end you will appreciate it much more.
As to when to make payments, Pamela, do it at your convenience. I am not much of a fan of the bi-weekly programs because most lenders charge such a hefty set-up fee. Whether you add a little bit each month or do it sporadically when you have had a profitable month, it makes little difference. Many people make a lump sum payment when they get their annual bonus or when they get the tax refund.
The important thing is to set a goal as to when you want your loan paid off. I encourage you to keep a spreadsheet to keep track of your progress. There are many calculators on the Internet that can help you get started with the right payment to achieve your timetable. . Try the ones at the Mortgage Professor’s website.
I think that this issue is especially important to the many people who have refinanced into new 30-year loans. Maybe they were 7 years into the old loan. They may have lowered their monthly payment but added tens of thousands of dollars to their total interest bill. Instead, they should keep making the old payment and convert the interest rate savings into principal reduction. That knocks years off the payment period.