Mortgage Payments?

Question

Why is paying half of your monthly mortgage payment in the middle of the month and the half at the end of the month cuts the amount of total interest & years to the mortgage? I did not think the mortgage calculator is the same as a CC calculator. Can some please clarify.

Answer 1

You are not carrying the interest for the full amount of the mortgage since you are paying half during the middle of the month you are taking off an amount which can be used to tack on more interest. The larger the balance a month the more interest is tacked on. Therefore cutting your years down on paying it off. Also adding more to your payment and stating that the extra is soley for the principal will cut down on the years you pay as well.

Answer 2

Usually the only difference between a credit card and a mortgage is the amount that is due. Meaning that a credit card payment usually goes down as the balance lowers over time. This is why credit cards take so long to pay off. A credit cards interest accrues the same as a mortgage as long as you have a simple interest mortgage. Sometimes this is even called a daily accrued balance. What this means is that every day the interest accrues according to your principal balance. So if you are to make a payment in the middle of the month (usually half payment), then the principal will go down some (payment - interest owed = principal reduction). Now when the interest is accrued for the next payment it is calculated with the new lower principal balance. If you make your payments bi-monthly (twice a month, half payments) you do not really save much time or interest. However, if you were to make bi-weekly (half payment every other week), you can save around 8 years and depending on the amount of the mortgage, a substantial amount of interest. My suggestion is to take advantage of bi-weekly payments as long as it does not cost a leg and an arm to enroll in the program and have a monthly cost. If this is the case you may be better off to just make one extra mortgage payment a year.

Answer 3

What you are speaking of is a biweekly payment program. Under this program, you are really not just paying 2 payments per month. Instead, you are actually paying your mortgage payment every two weeks making a total of 26 payments per year. By paying half a mortgage payment every two weeks instead of once a month, you essentially create an extra payment, or close to it by the end of the year which reduces the amount of principal that you owe.

I'm not knocking the program at all. However, those that sell the program would lead you to believe that it is the greatest thing since sliced bread, but you can actually do the same thing by taking your current payment dividing it by 12 and applying that extra amount to your mortgage payment without paying someone to do it for you.

It will reduce your principal, and if you have a month where you don't have the extra couple hundred bucks, you are not obligated to pay it. Hope this helps.

Good luck...

Answer 4

Actually, you're not paying half in the middle and half in the end. That really won't save you much money doing it that way.

You're paying half the normal payment every 2 weeks, presumably just after your regular payday. That works out to 26 bi-weekly payments a year, the equivalent of 13 monthly payments or an extra principal payment each year. THAT will knock several years off the term of the loan and will save thousands of $$$ over the life of the loan.

Most lenders will try to rip you off if you go this way, however. They'll levy a fee for converting your mortgage and possibly stick you with a monthly service fee for the privilege. There's a better way that avoids that BS. Add 1/12th of a month's payment with each monthly payment. Enclose a note telling them to put the extra $$$ against the principal of the loan. (If you don't enclose the note, most lenders will dump it in your impound account where it will do you no good at all.)

Paying extra with every payment also gives you the option of only paying the regular payment if money is tight in any given month. If you convert your mortgage to a bi-weekly one, you'll be legally obligated for the bi-weekly payments even in a tight month.

Answer 5

When you pay a mortgage payment you pay interest first. That's why at closing you have a per Diem interest from the date of closing to the end of the month (see your HUD Settlement Statement). So paying in the middle of the month, you pay interest first and a little on the principal. Then at the end of the month when you make the second half, the interest is on a lower principal (more of the payment goes to principal). You can also shorten your term and amount of interest paid if you pay as little as $25.00 more a month than your mortgage payment. Just let the lender know you want the extra to be applied to the mortgage principal. Thus when you make your payments, the interest is applied to a lower principal amount. Make sense?

Answer 6

If you are making semi-monthly payments, i.e. 2 payments every month, then you are paying some of the principal amount off early each month, and over all they will reduce your total interest over the life of the loan, and thus reduce your monthly payment a little.

If you make bi-weekly payments, i.e. every 2 weeks, you will actually make 2 more payments over the course of the year (26 vs. 24 with the semi-monthly). That's because there will be 2 months where you will actually make 3 payments instead of 2. So not only do you pay less interest, but you will typically pay off the loan sooner, thus saving even more money.

A bi-weekly mortgage payment may make sense if you also get paid bi-weekly.

Answer 7

It only shortens the term of the loan if you pay half a payment every two weeks. (not twice a month) There is a difference.

You will cut about 7 years off your mortgage if you pay one half mortgage payment every other Friday for example.

Answer 8

its the calculation of interest compounded daily (or more often)

Amount owed = amount borrowed * (1 + (annual interest/compounding interval))^number of intervals.

By rearranging the equation, and then adding the parts to deal with the payments, you can plug that into a spreadsheet and prove that ANY early payment reduces the interest.

The more early payments... the more it affects the interest.

The earlier in the loan you make the added payment the more effect it has over the life of the loan.

Use a spreadsheet and you can play with the numbers and see the results much more clearly than with one of the amortization calculator programs that don't give each individual factor for you to look at.

Answer 9

You will get a few "counter checks" when you open your checking account. You must be sure the lender receives the check by the first of June. No, it will not be okay to send it on the 31st of May. Probably better not to start off on the wrong foot. If you already have an established account at a bank or credit union, ask them to issue a certified cashier's check in the amount of your payment. Put it in the mail at least 3 days prior to June 1st to ensure the money gets there on time.

Answer 10

Because part of each payment is going to principal thereby reducting the principal, thereby making extra payment like 13 months instead of 12. By the way, I dont recommend it. If you want to pay it sooner, add extra to your payment and have it applied to principal, which should be automatic.