For Mark Roberts’ Use: For generations, retiring free of debts has been a central part of the American Dream. In particular, most of us hope to pay off our homes before we retire, allowing us greater flexibility in our retirement budgets. But of course, many of us purchase our homes by utilizing a 30-year mortgage, and due to how interest is structured on these loans, we end up paying two or three times the original purchase price of the house. And since many of us didn’t purchase our homes until our careers were well-established, that 30-year mortgage might very well last into retirement.
Of course, that situation only occurs if you use the standard monthly payment plan, and make 360 consecutive mortgage payments over the life of the loan. But most mortgage companies will allow you to elect a biweekly payment schedule, which can actually shorten both the life of the loan and the final amount paid for the home.
How does it work? Consider this theoretical example: A couple, with a mortgage payment of 1,000 per month, decides to make the change to a biweekly payment schedule. You might imagine that this means they will simply pay 500 dollars, twice per month, and the end result would be the same.
However, a biweekly repayment plan is not the same as making two half-payments per month. There are 52 weeks per year, which means a biweekly payment plan will work out to 26 payments per year. If this couple simply made two payments per month, they would have made only 24 payments in that same year. In other words, switching to a biweekly (not twice-monthly) repayment plan means that this imaginary couple will be making one extra payment toward their mortgage each year.
The end result is that making one extra payment per year can shorten the term of your mortgage by five years or more. You will also save thousands of dollars in interest.
If you’re on a biweekly pay schedule at your company, you probably won’t notice much different in your budget. You could even set up your biweekly mortgage payments as direct debits from your checking account to coincide with your paydays.
If paying off your mortgage is one of your retirement planning goals, simply changing your repayment schedule can help you reach that goal much faster. Give us a call! We would love to meet with you to discuss your objectives, help you develop other financial strategies, and establish a timeline for your retirement.
