San Diego Housing Bubble News and Analysis

"The only thing I can think of is that maybe they meant to send in 1/2 month payment every 2 weeks which means that in a full year you would have made 1 extra months payment. They didn't spell this out correctly."

I believe one extra payment will take 5 years off, not 10.The advantage to the bank of having 1/2 the money earlier in the month would have to compensate for the rest. Over the years I have seen a few programs like this but am not sure they were designed to shave years off the mortgage. I think they came with a better rate so the benefit was shared with between the borrower and the leder.

HLS could speak to this very well I am sure.

In theory, yes.

But if you send the bank 1/2 of your payment they will apply it ALL to interest so you're not reducing principal thus making no difference.

Interest is calculated on a full month basis. As soon as the bank applies a payment, they will send you another statement for the next month. You can make your mortgage payments early but you will not reduce principal by making more frequent or early payments (even if, in January you make 1 year's worth of mortgage and interest payments in advance of when they are due).

The only way to reduce principal is to make additional principal payments on top of your normal monthly payments (more cash flow out of your pocket).

PS: There are some services that purport to do it for you for a fee. They don't work and what you pay in fee is more costly.

I was offered a bi-weekly payment option when I bought my last house. As I recall it knocked off about 6 or 7 years of payments on a 30 year loan. Since I was just scraping by at the time I elected to stay with the monthly payment and when I could I payed extra. A bi-weekly is a good way to go if you plan on staying in the home long term and your finances can handle two large payments per month. I'm a little too scatter brained to make sure I always have that much in my checking account.

No way, Alex. One's got to make larger or more frequent payments in order to pay the mortgage early (as you say, bi-weekly, for example). It's as simple as that. More money needs to come out of one's pocket and go to the bank, it's basic math. Every two weeks, every full moon, every time the Padres win, whatever. The thing is, if one makes extra payments, then the mortgage will be paid off early.

And, since we're on this topic, let me address the miracle software thing discussed on a nearby thread. Ahem... I'll try to put on a straight face... OK, I give up... Bwahahahahhahaha...

But seriously now: how could anybody fall for that scam is beyond me. Do people really have no math skills whatsoever these days?

I was offered a bi-weekly payment option when I bought my last house. As I recall it knocked off about 6 or 7 years of payments on a 30 year loan.

If the lender offers that option, then yes, it works.  But you have to pay 24 times per year.  You can't arbitrarily select to do it or not on your own. 

If it's some service or software problem then it's bull.  

"let me address the miracle software thing discussed on a nearby thread."

That topic is not being discussed on that thread so much any more. It is more about the, value or lack of, in paying off a house early, by any means.

Rustico,

No offense meant to those posting on that thread, I'm aware the topic has drifted. But I guess I do feel pity for the poor suckers, wherever they may be, who paid the big bucks for that piece of software...

You can do a lot a pre-payment experiments yourself online, with calculators such as http://www.bankrate.com/brm/mortgage-cal.... (I used $100K, 6%, 30yr fixed).

So, how much does paying half of each payment half a month early speed things up? Let's simplify: make a full extra payment at the start; this is the same as paying all of each payment a full month early. How much time does this take off the loan? About 5 months -- not bad for a single payment, but not a multi-year miracle, either.

Adding 10% extra to each payment shaves off about 6 years; 20% shaves off 10 years. If you're looking to pay off early, such a habit is the way to go. Keep it simple, don't look for miracles in software or complicated schemes.

(Just keeping track of twice the number of payments over 30 years would drive me nuts, and would make the 5-month savings not worth it to me!)

No offense meant to those posting on that thread, I'm aware the topic has drifted. But I guess I do feel pity for the poor suckers, wherever they may be, who paid the big bucks for that piece of software...

No problem ...I just responded to you to see if I could sucker someone into putting their two cents in on the other thread...with attention to the current focus. I just wonder why software like that would cost as much as a loaded auto- cad for instance? If the program did work it isn't very sophisticated technologically. It should be free.

Adding 10% extra to each payment shaves off about 6 years; 20% shaves off 10 years. If you're looking to pay off early, such a habit is the way to go.

The key here is extra payments (more initial cash outflow for the borrower).  Simply making two payments won't cut it.  I think that Alex was looking for some "magic." 

Incidentally, I hear that some lenders refuse anything less then the full payment amount.  

Daniel
I would not go buying the software youa re referring to but I am going to point out somewhting with respect to human behavior.

My wife wnet on a few diets and tried to do it on her own. It worked OK. She joined weightwatchers and paid money. She lost the weight and then got the luxury of not having to pay as long as she kept to her target weight. This is an empowering event. She gained control and simultaneously was penalized if she fell off.

Now you could easliy argue that she never needed to pay for weight watchers but the reality was that she was paying to achieve a certain outcome.

If someone who was disorganized about finances paid for a program and by paying were diciplined moving forward becasue they paid big bucks for a program than maybe they to achieved the desired outcome.

I am not going to judge as critically as others. Not everyone is good with finance or organized with their money.

Rustico, I think that most people would benefit from paying down (and eventually off) their mortgages.

1) For peace of mind.
2) So they don't spend the money on something else.
3) Keeps them on a monthly routine they are used to. There's a comfort level in regularity.

The reason so many people are in trouble today is that they accessed all their equity using the new "innovative" products and spent it all.

Of course, more sophisticated owners/investors who can manage their money well can place their funds in place that return more than the mortgage. Mortgage money is subsidized in many ways so it's cheap money. You can earn more in other places.

I would not refinance my 5% mortgage unless the interest rates go down. There are cost associated with refinancing. I'd just as well continue to pay it down.

Some business people take risks with their equity money. In a booming economic, the risks are worth taking, but in a recession, even equity millionaires end up on the street. It's a fact of life.

I'm all for treating the primary residence as a home (consumption) rather than an investment. Any appreciation is gravy when you sell the house.

This is the second thread on essentially pulling a fast on one the bank in the form of "interest management". I'm no expert but I'd bet my last dollar banks have thought of and insultated themselves from any opportunity of losing interest that can be schemed up.

Save for revoloving half a million dollar debt between first year zero interest rate credit cards for 30 years, I can't imagine any legal or non-pain-in-the-ass way around it.

Just take out a 15 year loan. Lower rates, and truly pay it off in half the time, with a ~35% higher monthly payment.

"I was offered a bi-weekly payment option when I bought my last house. As I recall it knocked off about 6 or 7 years of payments on a 30 year loan."

"If the lender offers that option, then yes, it works. But you have to pay 24 times per year. You can't arbitrarily select to do it or not on your own."

There are 52 weeks in a year so it would work out to 26 bi-weekly payments in a year. That would pretty much be like making one extra monthly payment a year.

patientlywaiting

"But if you send the bank 1/2 of your payment they will apply it ALL to interest so you're not reducing principal thus making no difference"

That's not necessarily true. It increase the amount you are applying to the principal on the following payment threrefore reducing the outstanding principal balance. So there is a 1 pay lag time.

It increase the amount you are applying to the principal on the following payment threrefore reducing the outstanding principal balance. So there is a 1 pay lag time.

No it doesn't.  Test it.   I tested it with my lender (Wells Fargo) and it makes no difference.  

It also makes no difference if you pay your mortgage early (for example pay December's payment in October).    Since I pay electronically, I schedule the payment only a couple of days before it's absolutely due (generally the 15th).  

Please test it with your lender and report back.  

(I'm talking about timing of mortgage payments here, NOT making any additional principal payments).  

"Just take out a 15 year loan. Lower rates, and truly pay it off in half the time, with a ~35% higher monthly payment."

That is great if you are in a position to find a house that you, and better half if applicable, will accept and can qualify for it on a fifteen year loan. The flexibility of paying a lot in a good streak and the safety a smaller payment otherwise is more practical for many people.

patientlywaiting

You need to indicate to the lender that you wnat overage applied to the balance otherwise they are simply going to apply it towards the next months payment.

You need to indicate to the lender that you wnat overage applied to the balance otherwise they are simply going to apply it towards the next months payment.

That equates to making an ADDITIONAL principal payment.   You will still owe the full of next month's payment.   If your cash flow is limited, that will not work.  

To address the OP's question, for example, if your P&I is $1000/month.  There is no way you can rearrange (slice and dice into more than 12 payments) paying $12,000 total for the year and reduce the principal more than paying $1000/mo when due.  Of course, if you pay $12,500 then your principal would be reduced some more -- but that is only because you made that extra $500 payment.   That is a problem if you don't have the extra $500. 

Rustico, agreed, and like I said, I'm no expert, it just sounds like from what I read either a shady scam, or more risky for your credit score, and in terms of how much debt you incur in addition to the house to make it worth it.

In the other thread I had commented that if there was truly a way to pay a mortgage off in 1/3 the time it would be bigger than a video on youtube. Then again maybe I'm not smart enough to see how this could work. I can accept that.

cooprider14
I have to say that I have not done the proof and right now but this is not as uncommon as people are making it out to be. It is used in Australia and Europe.

I wouldn't be so skeptical of different techniques. There are a lot of Diesel cars in Europe that have not made their way to the States and they are far more efficient and practical. If they show up and Youtube that means they are a scam???

You guys are focusing on the wrong side of this pay down deal. You are only looking at the rate. To equate a monthly payment it is rate times the balance. If my payment goes in first and immediately reduces my outstanding principal balance at the beginining of the month from 100000 to 97000 on the First Day of the month, and then as the month goes on my balance goes from 0 to 3000 at the end of the month on the heloc so that my daily interest can actually go down on then net. It is complicated and requires timing your payment and manging your cash flow. Again I am not endorsing the product but I think I get how it works.

Quick math 4% interest on 100000K loan is $4000. Time the payments so that you are putting 100% of payment immediately toward balance so that you are systematically lowering the average outstanding balance throughout the year to 90000 and you can have a higher rate of %4.44 and still only pay 4000 in interest.

I think this is the concept. There more to it than some people of you are dismissing. But it requires more effort than it is worth for the average Joe.

I've lurked a long time and thought I should throw in my two cents worth. A good way to pay down the mortgage is to pay the next months principle along with this months payment. Initially, the payment is comprised of mostly interest with little principle, the extra is not a big stretch. As the years go by, the principal payment increases but theoretically so does your income. You can chose to make the extra payment or not each month. If you do it this way, its a 15 year mortgage.

jamsvet has it right... It's called the "Bankers Secret"; another formulation is: look at your principal payment, and pay double that (with the interest) each month.

Two comments.

1) You don't need software to do this. Just the cash to pre-pay.

2) You can't get a significant advantage with timing schemes. If you want to shorten your mortgage, here's the shocking tip: pay more each month.

The worst effect of this damn bubble is that people saw neighbors buying Escalades and yachts with their HELOCs and, rather than being reinforced into paying their debts off, one painful dollar at a time, threw caution to the wind and joined the party. A dead-man's party.

DCRogers

FYI: This was in Men's Health magazine. it specifically says:

"Banks compound interest every day, so not waiting till the midmonth due date will save you thousands over the course of your loan. Split your payment in half and send your bank a check every 2 weeks; it will cut 10 years off the life of a 30-year loan."

"Banks compound interest every day, so not waiting till the midmonth due date will save you thousands over the course of your loan. Split your payment in half and send your bank a check every 2 weeks; it will cut 10 years off the life of a 30-year loan."

Has anyone here actually done this?

"Banks compound interest every day, so not waiting till the midmonth due date will save you thousands over the course of your loan. Split your payment in half and send your bank a check every 2 weeks; it will cut 10 years off the life of a 30-year loan."

I tried so I know well. No. They do not.

Here's an example of a $100,000 loan at 10%. It does not matter when you make the monthly payments. You owe 1 month month interest regardless of when you make the payment.

For the year, your total PI payments are $10,530.86. Unless your total payments are MORE than that for the year, there is NO WAY your principal balance can be reduced any faster.

The interest payments will always = Beginning Principal * interest rate / 12. The extra goes to principal. That is regardless of when you make your mortgage payments.

If you cut your monthly payment in 2 halves, the first half payment will be applied all to interest with no affect on your principal balance.

Try it with your own mortgage.

Beginning balance before each payment of $877.57
$ 100,000.00
99,955.76
99,911.15
99,866.18
99,820.82
99,775.09
99,728.98
99,682.48
99,635.60
99,588.32
99,540.65
99,492.59

Interest Payments
$833.33
832.96
832.59
832.22
831.84
831.46
831.07
830.69
830.30
829.90
829.51
829.10

Principal Payments
$44.24
44.61
44.98
45.35
45.73
46.11
46.50
46.88
47.27
47.67
48.07
48.47

Actually, if you read the fine print, you realize that the advertisements say something like Bi-Monthly, but the fine print says bi-weekly.

Bi-Monthly: 2 payments exactly everything month.

Bi-Weekly: 1 payment every two weeks.

The two aren't equal.

There's a difference between bi-monthly mortgage versus bi-weekly mortgage. Bi-monthly doesn't save you jack on the mortgage. Bi-weekly, means your making extra payments . You get the same effect roughly by making 1 extra mortgage payment applied completely to principle each year, spread out over 12 months.

Been, there investigated that. At least BofA are pretty upfront and honest about it if you ask. If my wife and I could have skinned a mortgage another way, we would have already done it.

I just wonder if I get the principle down to really low say in 5 years, could I restructure remaining balance over the remaining term of the 30year loan at the same interest rate. I doubt it, but haven't tried asking.

I think this works if and only if the interest on your mortgage is compounded daily.

It's the miracle of compound interest. The more frequent the period of compounding, the greater the debt (or investment) becomes.

Splitting your payment into smaller, more frequent chunks is the same concept. You are mowing down that daily compounding interest more frequently so it can't feed off itself as much. So, you end up paying less interest.

I don't think this would work on a monthly compounding loan.

Edit:
Here's a good link- paying bimonthly gets you free and clear one month sooner:
http://mortgage-x.com/library/bimonthly.htm
Of course this doesn't consider the opportunity cost of paying early.

jamsvet
I think this is a good suggestion but if I had a choice of putting extra money toward my mortgage payment at 6% or throwing it into an index mutual fund I would probably choose to throw it in the index fund. Historically the mutual fund will get you 10% and at a fixed rate of 6% I feel I benefit from the laws of compunding. ANything that I am missing in this logic.

I think this is a good suggestion but if I had a choice of putting extra money toward my mortgage payment at 6% or throwing it into an index mutual fund I would probably choose to throw it in the index fund. Historically the mutual fund will get you 10% and at a fixed rate of 6% I feel I benefit from the laws of compunding. ANything that I am missing in this logic.

Raybyrnes,

I guess it depends on how much churn your mutual/index fund does in terms of cap gains/dividends distribution. Although ideally it's 10%, reality is there probably will be some distribution at which you'll have to pay taxes. Hence, it's not really 10% gain versus 6%. I'm not sure exactly where my own cutoff is, but I think since my mortgage is 5.5% range, there's slightly more room for me to play this game. Still, I was counting on interest rates on tradition savings/cd's to go up as part of this, so that I would hold some amount in equities and some in short term CD's. But obviously with the fed rate cuts, kinda throws a wrinkle. So to be safe, I've started to pay more of my principle off each month.