You can find many ways to save money when getting a home loan -- shop around for the best offer, work on improving your credit score, and increase your down payment to name a few -- but once you borrow the money, there are some strategies you can employ to realize greater savings. A common tactic is to make biweekly mortgage payments.
It's a simple concept: Instead of making a single, monthly mortgage payment, you evenly divide the monthly payment and pay that amount every two weeks. With 52 weeks in a year, that amounts to 26 half-payments, or the equivalent of 13 monthly payments. This means you make one more monthly payment than you would if you just paid once a month. Over time, that can result in significant savings in interest, depending on how much you borrow and what your interest rate is.
So how much can you really save?
To put this into concrete terms, here's how it would work with recent rates. In August, an average mortgage amounted to $317,035 in the U.S., according to the Mortgage Bankers Association. As of Sept. 10, the average rate on a 30-year, fixed-rate mortgage was 3.9%, according to Freddie Mac's weekly primary mortgage market survey. Both figures are the most recent available.
The monthly payment on that loan would be $1,495.35. Half of that is $747.68. If you paid $747.68 every two weeks instead of $1,495.35 once a month, you would save $35,413.28 in interest and pay off the loan four years faster. By paying an extra $1,495.35 a year, you save $35,413.28 over the life of the loan.
That's a lot of money. Like several fantastic vacations' worth of money (or about a year of college tuition, if you want to go the more "practical" route). It's amazing how much interest adds up. You can see how much interest is costing you with this lifetime cost of debt calculator. It takes your credit score (you can get your credit scores for free on Credit.com if you don't know where you stand) and uses it to calculate just how much the average borrower with your credit is paying in interest over a lifetime. If you're able raise your credit score to secure a lower interest rate on your mortgage, for example, your credit score can make a significant difference in what that home costs you.
-- -- --