Which mortgage payment plan is best?

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Dear Dr. Don,
My name is Juan and I just purchased a new home and would like your advice on what the fastest method is to pay off the mortgage. The loan is a 30-year fixed-rate mortgage at 5 percent. The loan amount is $339,700.

I was planning on making biweekly payments plus adding $300 in additional principal payments to the biweekly payment. I also plan to make a lump sum payment of $50,000 in December 2011. Is this the best option? Or, should I pay monthly and make the $600 payment every month ($50,000 will be paid in December 2011). I’ve read in your column that you do not favor biweekly payments.
— Juan Biweekly

Dear Juan,
The magic in biweekly mortgage payments is in the homeowner making the equivalent of 13 monthly mortgage payments in a year and not from any monthly interest savings resulting from more frequent payments.

Let’s make an apples-to-apples comparison between the biweekly mortgage with additional principal payments and the monthly mortgage with additional principal payments. To do so, you would have to contribute more than $600 a month in additional principal payments to the monthly mortgage payment. To compare the two, you want the annual payments for the two options to be the same.

The logic behind this is that if you can afford to make 26 biweekly payments with an additional principal payment of $300 a payment, you can afford to make 12 monthly payments with additional principal payments equal to a 13th monthly payment, plus $7,800 (26 multiplied by $300). The table below shows the equivalence for a mortgage with your loan balance at 5.25 percent interest, with a $50,000 lump sum payment made in December 2011:

Comparing 2 payment plans
Monthly Biweekly
Loan amount $339,700 $339,700
Loan term (months) 360 360
Interest rate 5.25 percent 5.25 percent
Monthly payment $1,875.84
Biweekly payment $ 937.92
Additional principal payment $806.32 $300.00
Total payment $2,682.16 $1,237.92
Annual payments $32,185.87 $32,185.87
Total interest $112,472.03 $112,389.77
Difference = $(82.26)

Your decision to make a $50,000 lump sum payment in December 2011 would have about the same effect on the biweekly and the monthly mortgage. Make sure that the lender won’t charge a prepayment penalty on the additional principal payment.

Add in the $50,000 lump sum payment and the difference in total interest expense between the two loans in this example is about $82.26 — with the biweekly mortgage having a slightly lower interest expense. To me it’s not worth the hassle of having a biweekly mortgage to realize such a small amount of savings.

Finding a mortgage calculator that lets you add additional principal payments to a biweekly mortgage isn’t easy. The Mortgage Professor has two on his site, where you have a choice between “Biweekly Payments Applied Biweekly” and “Biweekly Payments Applied Monthly.” The results will still be close, but the second calculator assumes the lender only adjusts principal balances one time each month.

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