What is the best way to pay your mortgage?

By james on March 10, 2011

So now you've got a mortgage.  What is the best way to pay it?  Should you make extra payments? What about bi-weekly payment programs?  Should you sign up for auto pay directly with your mortgage lender? There are lots of choices to make, and you've got to make the one that you can live with.  One thing that I recommend to all of my clients is to be sure that they stay consistent with their payment plan.  New homeowners can sometimes get into the trap of waiting until the 15th of the month to pay because "that's when they want it."  Its just a dangerous habit to get into, in my opinion. My advice is to make the full mortgage payment no later than the 5th of the month.  I also think that signing up for direct auto pay with the mortgage lender may not be the best approach, either.  The way I suggest my clients set their payments up is with a scheduled bill pay "push" from their checking accounts.  This is different than the auto pay ACH "pull" from the mortgage lender, and I think it gives you more control over your cash flow. Using your bank's bill pay allows you to move the date that the payment goes out very easily if you need to.  It also makes it easy to change where the payment is sent if the loan servicing is ever transferred. I think the key is to set up some kind of automated process, though.

Regarding bi-weekly payment plans, or making a 13th payment every year, I tend to try and discourage my clients from doing this. Bi-weekly payments accelerate the payoff of a mortgage and dramatically lower the cost in saved interest over time.  However, you can achieve an even better effect for yourself by saving any extra money you have as opposed to giving that money to the mortgage company.  Yes giving that money does bring you closer to that promised land of "free and clear", but the problem is that the money is GONE!  You are locking it up into your real estate by doing this.  If you ever needed to access that equity you have only two choices:

  1. Qualify for a refinance or equity line, or

  2. Sell the real estate.

Also, that money you give the bank has zero rate of return.  The mortgage company loves you so much for giving them extra money!! You are "the BEST!" they say.

Try this approach instead:  SAVE YOUR MONEY! A bi-weekly plan has the effect of applying 13 payments to your mortgage every calendar year, and it turns a 30 year mortgage into something close to a 21 year mortgage.  Why don't you do this instead --  take one mortgage payment and divide it by 12.  This is the dollar amount we want to set aside every month towards our new "mortgage payoff account".  Open up an online savings account with ING Direct, or HSBC or wherever.  There are no minimums, they usually pay a little return, and they have easy automatic savings transfers you can set up.

So now you set up an automatic sweep from your checking account into this savings account once a month -- or even divide it by 4 and do a super small once a week savings sweep.  Guess what, in 21 years this savings account will have a balance that exceeds your mortgage balance JUST LIKE THAT BIWEEKLY PLAN!  But now you have the choice.  You can pay the loan off, or you can access that cash along the way as you go without having to go to the bank with hat in hand asking for a loan.

Call me and I can show you how my approach gives you the most control and the most cash, all while achieving any outcome that you desire!  Don't give your money to the mortgage bank!  Save it instead! Visit Portland Home Loan for more information.




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