GET OUT OF DEBT
At a recent family gathering, the patriarch of our family gathered us around to espouse the virtues of getting out of debt as quickly as possible. He shared stories of the Depression that were shared to him by his father of how families lost everything they did not own outright. He declared, “The time is now! Don’t wait. Manage yourselves and get out of debt.”
Right. But how? If, like the recent administration, we could print our own money we would pay off all of our obligations and eliminate our debt. Or would we? We will save that conversation for another day. That said, without limited resources it becomes extremely difficult to get out of debt – especially the millstone hanging around most of our necks called our home mortgage. Sometimes it feels a 30-year mortgage might as well be a 100-year mortgage – the never ending story. And to make matters worse many families are struggling with increased expenses and decreased income. How can we get out of debt when the cards are stacked against us?
Obviously there is no silver bullet. If there was, this conversation would not be necessary. So how do we attack our debt assuming our income is not going to increase?
BI-WEEKLY MORTGAGE PAYMENTS
One option well-disciplined families have been using for years is called the bi-weekly payment program. The program is simple but determining the benefit can be tricky. Here is the idea . . . Instead of making one full mortgage payment per month a family would make half of their monthly payment twice per month. Making half a payment twice a month works well for families that get paid every two weeks. The power lies in the 13th payment! When making one full payment per month you make a total of 12 payments per year. Making half a payment, every two weeks makes a total of 13 payments per year. The 13th payment goes directly to principle–nothing goes to interest. During the first seven years of a mortgage when 80-90% of a payment goes to interest, these principal reduction payments make a huge difference in total interest paid to the bank. Keep in mind, the bi-weekly mortgage payments require you pay more toward the principal balance of your mortgage every year. A bi-weekly program can easily be substituted by making a 13th payment at the end of the year. Setting up bi-weekly payments helps with the discipline aspect.
HOW MUCH WILL YOU SAVE
Scenario without making bi-weekly payments
5.5% interest rate
30 year fixed
$568 Monthly Principle & Interest Payment
$204,480 Total Principle & Interest Paid over 30 years (ouch)
Scenario with making bi-weekly payments
5.5% interest rate
30 year fixed
$568 Monthly Principle & Interest Payment ($284 twice per month)
Making bi-weekly payments will cut 5 years off of this mortgage leaving your term with 25 years
$170,400 Total Principle & Interest Paid over 25 years (ouch. But better)
$34,000 Saving compared to not making bi-weekly payments
The best bi-weekly payment calculator I have found is at:
If you need any help using it you can call me (Ryan Johnson) at 888-657-2848 ext. 228
A FEW POINTERS:
- There are high-cost third parties that charge families for setting up bi-weekly payments. In my opinion, it is more cost effective to set this up on your own. No need to pay someone for something so simple. To get the ball rolling call your lender and they can give you direction on how to do this
- Make sure there are no pre-payment penalties on your loan. If you are on a VA loan there are no prepayment penalties and this is a moot point. If you are on a conventional loan there is a possibility you can be penalized for paying down your principle balance before it is due (most pre-payments last between three and five years). If there is a pre-payment in place you will be penalized for making bi-weekly payments and the benefit will be eliminated