Mortgage payments: semi-monthly or extra payments?

Question

Which way is more cost effective for a mortgage payment: paying semi-monthly (400 fee to enroll) or making a extra payment of $500 /month towards the principal: i.e: 30 year fixed at 6% and paying $1500/month. Should I enroll on the semi monthly program or pay $2,000/month (1,500 + 500 towards principal every month)?
Thanks to all

Answer 1

"Cost effective" is relative in that it is dependent on what you can afford and what your financial goals are.

If you wish to pay off the principal of your mortgage the fastest, you can always pay extra toward principal (by law). However, this will not reduce your future payments, but simply pay off the balance sooner (at the end of the loan). Consequently, this won't save much in interest unless you make substantial extra principal payments.

Paying semi-monthly might accomplish the same thing, depending on the terms of the payment. If you sign up for semi-monthly and your interest is calculated based on principal or daily balance, you might save some in interest, thus more toward principal.

However, if in either case your goal is to pay off the principal as quickly as possible, the best advice I can offer is to pay the least amount possible toward principal (yes, you heard me right) and take the remainder and whatever you can afford and invest it in a long term investment. If you get a conservative average interest of 8% return on your investment, you will find yourself able to pay off your mortgage 10-12 years sooner. Compounding interest is the best kept secret in financial security.

Best of luck!

Answer 2

Paying semi-monthly will be lower cost to you, but paying $500/month towards your mortgage will pay down your mortgage much faster. Assuming your principal is $250,000, paying $500 extra per month reduces the number of monthly payments by 163, or 13.58 years, and reduces the interest and total paid by $146,128.41.

You won't come close to that paying semi-monthly.

Answer 3

It depends on your own financial condition and your anticipated future income and needs. You don't want to tie all your money up in the house to make your budget inflexible. Maybe the kids want to go away to college and you need more money to send them to school, for instance or you need a new car or truck or roof job or someone loses or quits a job and there is less income.

Our mortgage was a welcome tax shelter on which we made monthly payments until the last 2 years before my retirement from work. Then we just doubled up (there was no penalty for prepayment) on payments to pay off the loan.

If we needed any extra money we had assets we could liquify because we invested some money in a good brockerage account.

Answer 4

I would try the one extra (13th) payment each year, this is easy, no real budget strain, and does some big damage in the end if you just keep plodding with it.

Answer 5

The more you pay, the better...You'll pay off the loan faster that way