Dear Dr. Don,
I have been getting letters from my mortgage company advertising a plan that lets you make weekly mortgage payments that equal your one-time monthly payments. Is doing this on your own a better option than refinancing to save money paid to interest, or should this be done in addition to refinancing to a lower interest rate?
— Nick Nickels
There’s no need to take on a weekly mortgage payment plan with your lender. Because this month’s mortgage payment is paying last month’s interest expense, there’s no interest savings in making weekly payments. Since the lender is telling you the sum of the weekly payments is equal to your monthly payment, you’re also not making additional principal payments.
To reduce your interest expense on an existing loan, you need to make additional principal payments. You can do that on your own. If you are paid weekly and have trouble budgeting, then set up an automatic savings plan to fund your monthly mortgage payment and pay down more of the principal.
People who are paid weekly have four “five paycheck” months in a year. People who are paid biweekly have two “three paycheck” months in a year. Using this additional cash flow from your household’s monthly budget to make additional principal payments will reduce the effective term of your mortgage and lower your total interest expense. The amortization schedule on Bankrate’s mortgage calculator will let you calculate how additional principal payments reduce your loan term and interest expense.
The decision to refinance is based on how long you plan to stay in the house, the expected closing costs and how much lower the interest rate is on the new mortgage. At a minimum, you want to be in the home long enough that the reduction in interest expense exceeds the loan’s closing costs. Don’t worry about options to make biweekly or weekly mortgage payments on the new loan, either.
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