THIS WAS GOING TO BE A LETTER TO THE AARP BULLETIN EDITOR BUT I COULDN’T FIND A WAY TO SUBMIT IT ELECTRONICALLY.
One item in the July/August 2019 issue’s cover story (99 Great Ways to Save) is bad advice. The item is #33. Mortgage Magic: “A 30-year $300,000 mortgage at 4 percent costs $1,432 a month. But if you pay $716 every two weeks, you can cut interest payments by $34,000 over the life of the loan.”
This is actually true, but it’s bad advice because it overlooks important details. Mortgage companies charge fees for setting up something like this, and it’s unnecessary (it’s easy to see why). The AARP Bulletin should point this out if you really want to be helpful.
If you make half a payment every two weeks that is NOT the same as making half a payment twice a month. Making half a payment every 2 weeks means you make the equivalent of 13 (NOT 12) monthly payments every 52 weeks—actually slightly less (364 days) than a year. You’re paying an extra monthly payment each year. That’s why you can save so much over the life of the loan.
Simple. And you can easily do this just by adding an extra amount applied to premium reduction to each regular monthly payment. No extra fee, and it’s just as automatic.
Isn’t there an effect from making a partial payment early in each monthly period? yes, but it’s much less. Numerical example: $100,000, 6% annually, monthly payments for 30 years. Monthly payment, $599.55. Now let’s say you’re going to make two half payments each month (instead of once every two weeks). $100,000, 6% annually, exactly twice a month for 30 years. Bimonthly payment, $299.64, or $599.28 per month. Paying 27 cents extra each month has a MUCH smaller effect than making an extra full payment each year.
Making an extra full payment each year is what produces the saving, and you don’t have to pay the mortgage company a fee for the “privilege.” AARP Bulletin should have made it clear to readers. Your readers can understand it. They're smart enough.
@ml4044: Thank you for pointing out not everthing is as accurate as it seems to be written. Another similiar topic is Credit Card Balance Transfers and the Fees.
Let me head off the sentiment of 'one should not ever have credit card balances' sometimes an unexpected and necesary bill happens (medical, dental, auto repair). We are advised that Balance Transfers offering a low interest rate is the way to pay off faster, yet how do we determine if a 3% upfront Balance Transfer Fee with lower interest is better than a zero balance transfer Fee with higher interest or just continue to pay the higher interest rate avoiding the transfer Fee is best? Would you be willing to comment upon this? Do you know of a website that would do such comparision calculations? I am trying to help a neighbor pay-down funeral expenses and any advice would be greatly appreciated. Thanks!