Over the life of your career, many of your clients will ask how they can payoff their mortgage, more quickly and reduce the total amount of the interest charges.
The discussions often weigh the pros & cons of a 30 vs.15-year mortgage.
Another subject that may come up is the “bi-weekly mortgage” which lenders claim to save homeowners money.
But they seldom explain how. Because they can’t!
With a Bi-Weekly Mortgage:
The total payments for the life of the loan are unchanged.
The total interest paid on the life of the loan also remains the same.
In short; the bi-weekly mortgage is an advertising gimmick (bait & switch) used to just “make the phone ring”.
Shortening the Life of a Mortgage
There are only 2 possible ways for a borrower to reduce the overall interest paid during the life of the loans.
The 1st possibility is borrower utilizes a shorter payment period.
In addition to accelerating the amortization rate, shorter term loans offer a lower interest rate (approximately one half of a percent).
The only downside is the borrower is locked in to a higher payment for the life or the loan and in the event of a crisis the borrower may not be able to continue making the higher payment.
Let’s do the Math:
(all figures are rounded off)
1) A 30 Year Loan of $400k – with a 4.5% Interest Rate = Month P/I payment is $2025…Total “Interest Paid” over the life of the loan = $329,600k
2) A 15 Year Loan of $400k – 4% Interest Rate = a Monthly P/I payment is $2960..Total “Interest Paid” over the life of the loan = $132,500
A 2nd possibility is making extra (full or partial)
payments to pay down principal.
Here are 2 links that will help clients plan to reduce their mortgage debt!
This payoff calculator allows borrowers to specify almost any combination of payments, payment intervals and payment periods, and see the impact on the amortization schedule, payoff date and total interest paid.
For borrowers with a target payoff date & want to know how much extra they must pay, (above their required monthly payment),