Accelerating Your Mortgage Payments

People are constantly looking at refinancing a mortgage.  This might be an attractive option if you plan on paying a mortgage for 15+ years.  The problem is for people that are under 10 years away from paying off their mortgage.  For the latter case it might not always be worth it.  You need to do your due diligence.

With 5 year arms below 3% it is very tempting to think about refinancing.  Just remember re-financing also can involve a lot of fees.  This is why it is usually only worth it in the long run because it is only with time that those fees are saved through a lower payment.

There is however an easy way to accelerate payments and reduce interest.  The best way to reduce your home mortgage quickly is to participate in a 26 Payment Plan. Usually these plans are free and offered by all mortgage companies. In this plan instead of paying your mortgage once a month you will pay half the amount every 2 weeks. Since you are paying every 2 weeks you will end up making 1 extra monthly payment per year or 26 payments (13 monthly payments) per year.   By paying every 2 weeks interest does not build up all month long since you are paying more frequently.

I know that paying 1 extra payment per year can be difficult but the upside is that it will generally take 7.5 years off a 30 year fixed mortgage. If you use a mortgage calculator you will see that it will save you 10,000s of dollars.

Is Refinancing Always a Good Idea?

I am constantly bombarded by offers to refinance my mortgage.  Recently I was contacted by my mortgage company to refinance my current mortgage which is a 15 year fixed @ 4.75% interest to a 15 year at 4.25% interest.  Ones initial reaction might be to go for it.  However, upon further reflection and after consulting my credit union I decided it is not a good idea for me to refinance.  Personally I think if you have a mortgage under 5% it is pretty good.  Can you get a lower rate–possibly?  Is it worth refinancing? This will depend on the length of the mortgage.  If you have a 30 year mortgage is is most likely a good idea.  Please see the email exchanges below explaining why refinancing was not a good idea in my case.

My Email to the Credit Union

I currently have a 15 year fixed mortgage at 4.75%.  I have about 11 years left on the mortgage. I have a 26 payment plan and paying an additional $1,000 a month. Is it a good idea to try to refinance to a 4.25 to 4.35 % rate keeping a 15 year mortgage?

The Credit Union Response

Based on the current terms on your mortgage, I would not recommend a refinance, even if you could meet the qualifications to do so.

Your current rate is only 0.5% higher than our currently offered rate.   However, you would most likely pay at least 2-3% of the loan amount as closing costs.  This might be worthwhile if you had 30 years to amortize those closing costs.  However, you will be paying off any mortgage in 10-15 years, so you would not recover the up-front costs.

To summarize, I don’t see any advantage in refinancing.  You have a good loan, and your current practice of prepaying $1000 per months is very beneficial in terms of interest savings.  Again, even assuming that you could qualify for a refinance, my recommendation would be to stay with the program you have.

I hope this is helpful, and I would be happy to answer any further questions.

How interest effects monthly mortgage payments

How will a difference in interest rates change my
monthly mortgage payments? I have created a small
spreadsheet to the right which shows how your mortgage will change depending on your interest rate. However, the more interesting figure is how much you will pay in interest rate charges only– over the course of a 30 year $500,000 loan. At 7% you will pay almost 700K whereas at 5% it will be 466K a difference of almost a quarter million dollars.

Speeding up Mortgage Payments

The best way to reduce your home mortgage quickly is to participate in a 26 Payment Plan. Usually these plans are free and offered by all mortgage companies. In this plan instead of paying your mortgage once a month you will pay half the amount every 2 weeks. In addition, you will make 1 extra payment per year or a 13th payment under a traditional plan. By paying every 2 weeks interest does not build up all month since you are paying more frequently.

I know that paying 1 extra payment per year can be difficult but the upside is that it will generally take 7.5 years off a 30 year fixed mortgage. If you use a mortgage calculator you will see that it will save you 10,000s of dollars.