8.14.2024

A friend sent me the above Instagram Reel and asked, “Is this really true?” 

The gentleman shares a tip that can “literally save you thousands” and that tip is to pay your mortgage twice a month. He says, “Not more. You just split it up and pay half. So, if your payment is $4,000, you pay $2,000 on the 1st and $2,000 on the 15th and it just eats away at the principal.”

He says by splitting it up into two payments per month, instead of paying $1,000,000 in interest, this trick will save him $400,000.

Is this accurate? Well, yes and no.

First off, his trick might not be the best strategy…

Paying earlier would cut down on your interest. If you pay half on the 1st and half on the 15th, in theory, that should save you two weeks of interest on the first payment.

In reality, that doesn’t work because the mortgage company wouldn’t apply the first half payment to your principal. They would just hold onto it until they have the full payment and apply the whole thing. It’s an administrative nightmare for them, so they discourage it.

Also, that won’t save you that much money. Certainly not $400,000.

Secondly, he is misrepresenting the concept!

The *trick* he’s explaining—paying on the 1st and the 15th—refers to making semi-monthly payments. What he actually meant to tell you is to make bi-weekly payments. Semi-monthly is twice a month (typically on fixed dates), whereas bi-weekly is once every other week.

The real trick is that instead of making 12 monthly payments of $4,000, you make 26 bi-weekly payments, which is the equivalent of making 13 monthly payments of $4,000. One whole extra payment per year.

But the banks discourage this because it’s an administrative nightmare for them, so…

NOW WHAT? If you want to take advantage of this *trick*, make 13 monthly payments per year instead of 12. In this example, send in one extra $4,000 payment per year.

AN EVEN EASIER WAY? Increase your monthly payments by 1/12th (in this case about $350), make that automatic and make sure it is being applied to the principal, not interest.

I RAN THE NUMBERS. A $700,000 mortgage at a 7.1% interest rate (what he said) would cost approximately $1,000,000 in interest (pause for breath) over 30 years. 

The payment on that would be $4,700 per month (calculator) so if you added $400 to your payment (towards principal) you would save yourself $250,000 and pay off your mortgage 6.5 years early.

Not as good of a deal as what he was describing, but still pretty good!

If you want my excel model, email me and I’ll send it!

Questions, thoughts, topics you’re curious about? Email us at casey@your-orchard.com