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It’s Richard, founder of Short-Term Rental University and Airbnb super host. Today’s tip is really important and I am going to teach you how you can save five years of mortgage payments without it costing you even a penny more.
What am I talking about how can you prepay your mortgage without it costing you any more money. let’s just take a look at the numbers first.
There’s 52 weeks or 12 months in a year. Most of us pay monthly mortgage payments of around $1,000 (All examples are simplified for the sake of illustration. Actual Market values and mortgage rates do vary extensively).
We make a single $1,000 payment. However, if you were to pay $500 every two weeks it’s the same $1,000 but you would now be making 26 payments in a year. What this does is create a thirteenth monthly mortgage payment as opposed to twelve.
Your cash flow shouldn’t really change very much, but the effect is massive because you can cut down five years of a 30-year mortgage by just paying every two weeks. Before we do that let’s just go through some of the background details.
- make sure that you don’t have a prepayment penalty clause in your mortgage. Check with your bank or your mortgage note and see if there are any prepayment restrictions.
- you want to check with your bank that they’re going to know what to do with this extra payment and make sure that they apply it to the principal. Mortgage interest is calculated on a monthly basis based on the amount of principal that’s outstanding.
If you’re reducing the principal because you’re now doing this bi-weekly payment, the amount of interest that’s due changes and it gets reduced. That’s a huge amount just like saving for 10-30 years. Now the stock market compounding effect works for you by reducing your principal and your interest expense is getting reduced.
- make sure there is no prepayment penalty
- make sure your bank allows bi-weekly payments
- make sure when they accept the bi-weekly payment they know that the additional payment is going towards principal
If you get all that and you can afford to do this or change your automatic payments then it’s a no-brainer. If you have a mortgage at the current record low interest rates that we have right now which is 3%-4%, you can’t borrow at those rates. Because of this, it may not make sense for you to have more home equity you might prefer to have more disposable income to say grow your business or invest in something else.
That’s a very personal decision, I just want to point that out most people are fiscally conservative and would rather have less risk.
They associate less risk with less mortgage paid instead of less mortgage owed and so this is a great way to get higher amounts of principal and equity in your home reducing five years of payments at sixty payments that you would knock off. If that appeals to you then go for it!
What if my bank does not allow bi-weekly payments?
There are whole services that handle these payments. I don’t personally recommend these providers as I have I’ve never worked with them and they charge an upfront fee, a maintenance fee and then there’s a contract, I wouldn’t do that.
One hack around that might be to figure out what the extra payment would be to increase your monthly payment by a margin to account for a 13th payment. So again in the example, $1,000 is your monthly mortgage payment. Divide by twelve and you get $83. Add that to each of 12 payments and you get basically the exact same effect since mortgage interest is calculated on a monthly basis.
There’s always a way around, you just have to be creative and thoughtful and figure it out! Work with your bank so that they are helpful and they’re not causing any problems or headaches for you. This is a great way to save more money in your home if that’s your key objective. I hope you found this blog helpful please go ahead and leave comments below.
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