Something as easy as how to pay your mortgage should be a one paragraph column, but it isn't. As the industry has become more complex, the ways to pay your mortgage have also become more complicated. We have teaser rates, interest only rates, longer and longer terms on our loans, graduated payment loans and option arms with choices to be made each month. Add to the list is bi-weekly loans and the paragraph is over and all I have done is confused most of the readers. So now, I am going to spend the rest of the article giving you some ideas of how to pay your mortgage to best serve yourself.
First and foremost , you can pay any mortgage anyway you wish as long as you pay what is called for on the mortgage coupon. You can pay an interest only line as a fully amortized 15 year fixed. You can pay an option arm as an interest only loan or as a 15 year loan using the pay rate (teaser) as long as it covers the minimum (teaser) rate.. You can pay a 5 year arm as a fully amortized 5 year loan, even if it has a prepayment penalty attached. One can pay a 20 year fixed as a 10 year fully amortized loan. And having decided to one of any of the above you can change to another one each and every month. The caveat is always just to be sure you pay at least what the coupon is telling you to pay.
I am sure that at this point some of the readers are saying to themselves , and anyone who will listen ,that the 30 year fixed is the best loan for everyone because you can do as above and always have the "safety" of falling back to a 30 year. The reason that you shouldn't do that is the rate is too high. I will demonstrate the old adage; nothing beats a lower interest rate, and show you the fallacy of the above thinking.
A growing number of people are gravitating to the bi-weekly mortgage because it will pay your 30 year loan off in approximately 23 years. The design of the mortgage isn't what creates the quicker amortization it is the extra full payment you make each year (13 vs. 12).
If you had a 7% 30 year and decided to make it a bi-weekly, using a $250,000 loan for the example you would be spending about $21,700 a year in payments and lower the amortization to 23.33 years.
A 20 year fixed for the same amount @ 5.75% would have you paying about $21,000 a year in payments (12) and have you finished paying off the loan over 3 years faster.
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom.