For the past two weeks, we’ve been talking about how to effectively lower interest rates. In week one of this discussion, we defined effective interest rate, which you can read here.
Last week, we looked at an easy example of how you can lower your effective interest rate without refinancing your loan. If you missed it, or need a refresher, click here.
This week, we want to let you in on another neat lower interest trick. Take your regular monthly payment, divide that in half, and pay that amount every 2 weeks. NOT twice a month – – – > but, every 2 weeks. By doing so, you will be making one extra payment per year.
How does this lower interest on your loan? There are 52 weeks in a year. If you made a payment every two weeks, you would be making 26 HALF payments per year. That means you’re making 13 WHOLE payments per year, which is one extra payment per year. By doing so, you can turn your thirty-year mortgage into a 24-25 year mortgage depending on the interest rate and loan amount.
Remember our definition of effective interest rates?
The interest rate of your loan can only be charged on the current principle balance. So, each time your balance drops, the amount of interest you pay drops. The faster you drop your principle balance, the sooner you’ll pay off your loan, and the more you will save in interest over the life of your loan.
Let’s put some numbers behind this theory.
Now, I want to point out something. If you were ‘that guy’ who said you could just make the one extra payment per year on your own, you’re right – you can. This is a smaller loan amount, so in this example, you won’t see a big difference in margin as you would in larger loan amounts. If you just paid the one extra payment per year, you would still save $16,349.25 on a $100,000.00 loan. BUT – will you ACTUALLY do it? It’s very easy to break your payment down into two halves every two weeks and automate it through your bank account. Making an additional payment each year would require you to set aside the full amount at one time, which we all know can be difficult, especially at the end of the year.
Just lower interest rates the smart way. Divide your monthly payment in half and pay it every other week. You’ll be glad you did. As always we are happy to evaluate your finances as it relates to debt, we will provide a full analysis at no charge. Just give us a call or fill out the online application.