I frequently get offers in the mail to set up bi-weekly or weekly payment plans for my mortgage payments.  They claim this will save me tens of thousands of dollars over the life of the loan and I will pay it off sooner.  Is this a wise option?

In no other context is the expression "time is money" more applicable than in the borrowing of money.  Any plan which helps repay the principal faster will save you money in the long term.  Does this mean you should get a 15-year loan instead of a 30-year loan?  Not necessarily.

The most important issue in home ownership is your ability to afford the monthly payment.  Generally speaking, if you can get through the first year, you will be able to pay your mortgage over the long term.  Therefore, it makes sense to get a 30-year mortgage so that you will have a low monthly payment.  However, it does not mean you cannot help save yourself interest charges over the 30-year term.  During a 30-year self-amortizing loan, the principal payments of the loan at the beginning are generally quite small and, at the end of the loan, are quite large. You can usually obtain from your mortgage lender at the beginning of any loan term, an amortization schedule which shows exactly the principal and the interest component of each monthly payment.  If you get into a habit of paying an additional principal payment from the amortization schedule monthly, along with your principal and interest payment, it will in effect make your 30-year loan a 15-year loan.  If you get a bonus or come into a large sum of money, it is a wonderful feeling to pay down a sum of money toward principal and see how many monthly payments you knock off.  This method will give you the peace of mind of an affordable monthly payment and, at the same time, give you the ability to effect interest savings over the term of your loan by making prepayments of principal as you can afford them.


If you have questions about this or any other real estate matter, please contact Tom Bennett at (617) 531-6574 or tvb@barronstad.com.