Wednesday, October 19, 2005

Double monthly mortgage payments vs. Single monthly mortgage payments vs. A Third Option?

According to "The Automatic Millionnaire", the book that got me interested in personal finance issues, it is advised that we make two mortgage payments or make bi-weekly mortgage payments, which, in tota,l would equal to the monthly mortgage payment, in order to pay off your mortgage sooner (in some cases, even nine years sooner) than the loan period (i.e. 15 year, 30 year, etc.). By the end of one year, you would have ended making 26 half-of-a-month's-worth payments, meaning you would have made one extra monthly payment per year without you even realizing it!! Shaving off years off your loan period.

Sounds Good, right? Not so fast.....

However, my financial planner said that instead of paying bi-weekly mortgage payments, you should save that money that would have made that extra payment and put that savings to work! The trick is, of course, you would have to invest this savings in a money market account, savings account, taxable investment account, 401K investment account, roth IRA investment account, you name it.......whatever the type of account... the interest rate per year has to beat the mortgage interest rate.

For example, if your mortgage rate is fixed at 6 percent, you would have to invest the extra savings in an investment account that would be at least at 7 percent. Ah ha! There's also the other catch of FINDING something that would consistently beat your mortgage rate year after year. But then, you'll only need to beat it for as long as your mortgage loan period is. And, you'll end up making more profit than paying those extra mortgage payments.

3 comments:

  1. Say your mortgage was $800 and is due on the 15th, and you could either pay $400 on the 1st and 15th or $800 on the 15th.

    Now assuming you could find a rate to beat your mortgage, you'd still have to pull the $400 you invested on the 4th by the 15th. Wouldn't that mean it'd already have to be pretty liquid. I know if I put it in a mutal fund after I got paid on the 1st that I'd have to almost pull it out right away just to make sure I had it by the time I paid my mortgage.

    Would seem to me that it'd have to be in something like a savings account or a money market which won't get you beyond the mortgage rate in most cases.

    I could be missing something as I'm certinaly no expert.

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  2. Anonymous6:17 PM

    If U have time to read financial books, the book called "Ordinary People, Extraordinary Wealth" explains in Chpt 1 that you should not pay down your mortage but let it ride for the full 30 years while any extra money should go to savings or investments that will outperform your mortage rate. Oprah talks about this book:

    http://www.oprah.com/tows/booksseen/tows_book_20010228_redelman.jhtml

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