Last year I shared my DIY Loan calculator. It came in pretty handy for myself today because I was talking with a friend about the benefits of making half a mortgage payments every other week instead of the full amount once a month.
I'm currently on the once a month plan and wanted to know what level of savings I would get by switching to every 2 weeks. The idea is that instead of making a full payment every 1st of the month, you make half a payment on every other Monday (or whatever day of the week you choose). This has 2 advantages:
- The amount of interest calculated on the balance is technically smaller because it gets cut down just a little bit mid way through the month. Yes it's small, but it does add up over 30 years.
- A couple times during the year there are 5 weeks in the month. This means that at the end of the year you actually end up making 1 extra payment (26 half payments = 13 full payments). This dramatically reduces your principle.
Of course, there are also disadvantages:
- You really need to plan your funds carefully to be ready for when those 2 extra payments happen. It's not impossible, you just need to be ready for it. You also need to make sure you can actually afford the extra payments.
- The other disadvantage, especially for investment property, is that this reduces the cash-flow on your property. In the long-run (25 years later), it'll make a big difference, but you pay for it up front. When you first buy a building, there are often other repairs that need to happen too, so that money may be better spent elsewhere.
I was able to use my little calculator to figure out how much I would save. It is significant (~$30,000), and I'll pay off this property 5 years sooner, at which point the cash-flow becomes REALLY nice. The big question is whether I can afford it, and if the money would be better spent elsewhere.
I think my plan is to take that extra payment, divide it by 12, and put it into an ING savings account each month. Then, at the end of the year I can decide if I want to make a big dent on my principle, or use it somewhere else. Given my current low interest rate, I suspect I'll find other uses for it, especially since I own a new Jeep, but I'll withhold judgement for now.