When do you spend less and get more? It might be when you pay your bills, if you pay them in the right way. Today let’s talk about making half payments to get ahead.
The basic idea is to divide the payment in half and make a payment every two weeks. On the surface, you are still paying the same amount, but how does it change your payoff amount on a debt?
Let’s say you have a $200,000 mortgage at 4.2 percent. The payment would be $978 per month (not including the escrow account that pays taxes and insurance). If you made a payment of $436 every two weeks, would it save you any money?
If you pay on the first and the 15th, you would still be paying one payment each month and the savings would be only about $2,200 over the life of the loan. But if you pay every two weeks, you would actually make 26 payments during the year. This means you are paying one extra payment each year. That’s how many of us get paid, which also makes it much simpler to budget with half the mortgage payment out of each check. Using this procedure, you will be able to pay off your 30-year note in 25 years. That will save you real money — about $48,000 on the example mortgage of $200,000 according to my calculations using the calculator on bankrate.com.
Before you start to make half payments, make sure your lender allows early payments and what rules apply to them.
If you want to see how your mortgage would work on biweekly payments, check this website for a biweekly mortgage calculator at http://bit.ly/bankratecalulator.
Some loans offer to set up your mortgage as half payments, for a fee. In most cases, you can do the same thing yourself without the fee. Or, if you still want to make the same monthly payment, you can accomplish this early payoff by adding one-twelfth of the payment ($81 in our example) to the regular house payment each month.
Can the same process work on a car payment? Again, the biweekly payments make the most difference in pay off. A $25,000 car loan at 7 percent for 5 years would have a payment of $495 per month. If you pay $247.50 every two weeks, the vehicle would be paid off in 4 years and 7 months, saving you almost $2,500. Again, you need to check with your lenders and make sure they will accept biweekly payments.
The same principle works when it comes to your credit cards. Paying half the minimum payment 26 times a year will reduce the amount of time till that debt is paid off. It works by lowering your average daily balance, whichreduces the amount on which you have to pay interest, effectively lowering your credit charges. If you really want to pay that debt off sooner, pay the minimum amount twice a month. That debt will come down in a hurry.
Biweekly payments can help you save money and pay your debts off sooner.
Roxie Rodgers Dinstel is associate director of Cooperative Extension Service, a part of the University of Alaska Fairbanks, working in cooperation with the U.S. Department of Agriculture. Questions or column requests can be e-mailed to her at firstname.lastname@example.org or by calling 907-474-7201.