Paying Down Loan Quicker

[Jonathan Polacek]

Hello All!

I'm preparing to buy my first house. I will buy as a primary residence with either a 15 or 30 YR conventional loan and plan to rent it after two years of enjoying it and making it "tenant proof". After reading some of Brandon Turner's books, I plan to use the tips i've learned.  

I'm hoping this post can help other newbs, like myself, AFTER I've received confirmation from the pros that my math is correct and I'm implementing the learned tips correctly. This tip relates to paying off your loan quicker.

For example, I'll say that I can COMFORTABLY afford a $2,000 mortgage payment each month. I don't want to choose a home that gives me this initially because I want to pay it off quicker. So instead...

I choose a 15 YR conventional loan on a home that brings me a $1,500 mortgage payment each month. How can I pay it off in 10 YRs?

That would be a 33% decrease in time, adding 33% to my payment. Rather than simply adding 33% to my $1,500 payment (= $1,995) and making 12 payments each year, I can lower my monthly payment by paying bi-monthly (half my monthly payment every two weeks). This will give me 13 full, monthly payments, which will lower my monthly payment by dividing the yearly total by 13, rather than 12.

52 weeks in a year = 26 half payments = 13 full payments.

Here's the math:

1,500 X 12 = 18,000 (original yearly total); 18,000 X .33 = 5,940 --> $23,940 per year to pay off in 10 YRs.

 23,940 ÷ 13 = 1,841.54 --> 1,841.54 ÷ 2 = $920.77 bi-monthly payment  

I'll check my math...

920.77 X 26 = 23,940.02 *overage due to rounding.

Want to pay it off even faster? Another tip I got from Mr. Turner's books - get an extra payment in each year by dividing your monthly payment by total number of payments in a year and adding that amount to each payment. It should look like this.

1841.54 ÷ 26 = $70.83 --> 920.77 + 70.83 = $991.60 <-- This is my new bi-monthly payment and I am still under the $2000 per month mortgage payment that I know I can comfortably afford. How wonderful!

Anything i'm missing, pros? Any discrepancies? This is a simple and an incredible way to save THOUSANDS over the life of the loan. It blew my mind when I did the math to figure how much I'd save versus paying the given monthly mortgage over the full life of the loan.

Is this helpful? I am new to Bigger Pockets and want to be active. I am lacking in experience (not for long!), but I'm pretty good with numbers, so this is where my mind went. Thank you all for your helpful posts! I've really enjoyed the ones i've read.

Random info: I just learned that bi-monthly and bi-weekly can mean the same thing due to the pre-fix "bi" being able to mean EITHER "occurring twice in" OR "occurring every two". That's silly.:)

[Mike McCarthy]

I agree with @Red Smith. Unless you’re saving 0.5% or more on a 15 year loan, I wouldn’t consider it. You can always pay down a 30yr loan faster, but you can’t extend a 15yr.

Paying down your mortgage is great, and many people can save money for retirement by doing that. BUT, have you considered better use of that money? You’re on a RE forum, so my guess is yes.

There’s nowhere else that you can get money at 3.5%. Unless your only goal is to pay off your house, I would keep that cash and put it into some other investment. Whether it’s a simple index fund (7% per year), save up for another rental property, etc. In my opinion, there’s pretty much no reason you should pay down your mortgage faster - unless maybe you’re nearing retirement age.

Just something to consider!