Originally Posted by JohnGalt
I read a lot of articles about paying a mortgage off early. What is best?
1) bi weekly payments? I'm not quite following this one. Does it work like this: my first payment is due on 1/1/10 and I take possession on 12/1/10. Would I pay the whole payment on 1/1/10, and then half on 1/15/10, the other half on 1/30/10, and so on? The bank will apply the payment when received. How many years will this save me? And how?
waste a lot of time
do a lot of research here:
including the "Loan Decisions" Q&A, the "How much can I save if I start biweekly payments?" calculator, and the "How much faster can I pay off my mortgage by increasing my payments?" calculator.
First let's assume that "pay off the mortgage" is the way to go. If I were you I'd pay extra points for the lowest possible rate on a 30-year fixed-rate mortgage with just a monthly payment, and then keep an eye on CD interest rates. If
CD rates take off then I'd make the absolute minimum monthly payments on the mortgage and invest the rest of your spare cash in CDs.
You could get a 15-year loan (or even shorter) or have the lender set the biweekly payment requirements, but then you're playing the game by their rules instead of being able to change your own. By getting a fixed-rate long-term conventional mortgage, you can tailor the payment plan to your particular situation and its
changes instead of having to commit to the lender's shorter terms or bi-weekly payment plan.
Many years ago when we had a bi-weekly payment plan with NFCU, we paid the first month's interest at closing (on 1 Dec in your example). Then on 1 Jan we paid a half-month's payment and on the 15th we paid another half-month's payment. But a better way (from the lender's perspective) would be to collect half a payment on 15 Dec and the other half on 30 Dec, so you'd have to check very carefully which option they plan to do.
Another choice would be to send in half a payment (or more) every other Monday. This would actually result in 26 actual biweekly payments per year instead of 24 semi-monthly payments. This could quite possibly confuse the heck out of the lender, though, so it's probably best to stick with their 24 "bi-weekly" payments.
Another option more under your control, though, would be to send in that extra $50-$100 every other Monday or every payday. Or if you get a bonus payment then send in a large portion of that toward your mortgage principal. Most lenders require these payments to be clearly marked "additional principal" or they'll just credit the payment to the accrued interest (which leaves the principal unchanged and allows more interest to accrue on the higher principal). I even ran across one
lender in the 1980s who would put extra payments in the taxes/insurance impound account until it was at 100% and then credit the accrued interest before finally crediting the principal.
Before you accelerate your mortgage you might want to make sure that you obtain your full 401(k) match and (if applicable) your full deduction on your conventional IRA. That depends on your 401(k) match, your income tax bracket, and whether you're able to itemize deductions.