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Old 11-12-2010, 09:39 AM
 
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I'm interested in increasing my mortgage payment. Should I pay an extra $1k once a month, or $500 twice a month? Thanks for your insight.
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Old 11-12-2010, 09:47 AM
 
Location: Plano, Texas
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Really makes no difference since each month you would be sending an extra $1000.
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Old 11-12-2010, 10:17 AM
 
Location: Lakewood Ranch, FL
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If interest is calculated daily, you'd be better off sending the two payments. That means your interest is calculated on a lower balance from the 15th to the 30th, so to speak.
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Old 11-12-2010, 11:40 AM
 
Location: Albuquerque
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Quote:
Originally Posted by bbronston
If interest is calculated daily, ....
If your time is worth anything, just send in an extra $250 in principle (*)
whenever you make your payment - double benefit!

You get the benefit of interest calculated on a lower amount all month and
- more importantly - you only have to deal with one payment per month.

(*) more principle = faster repayment --> $350 is better than $250 in that regard.
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Old 11-12-2010, 01:34 PM
 
Location: Boise, ID
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If your bank has a way to make additional principal payments online, this is fast and easy, and you can do it whenever, and as often as you want. If you are sending in physical payments, I would do that less often, because it is less chances for them to make a mistake.

Twice a month does have a very slight benefit on interest if your amount compounds daily, but most of the programs you hear about have you paying every 2 weeks, because so many people get paid that way, and it gains you 2 extra half payments per year. Twice a month doesn't have that benefit, so the difference is very slight over paying monthly.
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Old 11-12-2010, 02:01 PM
 
Location: NJ
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I do two payments a month (for half the monthly amount) because my bank set it up for free. I have heard some banks will actually charge you a fee to do this. If that were the case I would probably just have sent in one extra payment each year.
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Old 11-12-2010, 02:06 PM
 
Location: Albuquerque
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Quote:
Originally Posted by Lacerta
Twice a month does have a very slight benefit
on interest if your amount compounds daily, ...
I would say that's not true.

If you split up the payment into 1/2 on the 1st and 1/2 on the 15th,
then you are applying less principle on the 1st, so more principle gets
the compounding from the 1st through the 14th.

There is no difference in principle applied after the 15th - other than
the accrued interest from the 1st through the 14th. Timing is everything.

If you pay all the principle on the 1st of the month -
you get more benefit. If you pay extra princple - better.

I can't imagine any bank not compounding daily.
Maybe there are some, but the calculation is so trivial ...
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Old 11-12-2010, 02:12 PM
 
Location: NJ
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I know when I set up my twice a month payment I asked this very question about saving on interest for half of the month. I was told that what was happening in reality was over the course of the year I was making one extra payment and that would then be applied in one shot once a year. So it had no bearing on monthly/daily interest savings and would have the same exact impact as just making a one time extra payment each year of a single payment.

Or at least that is how I remember it. It's all a blurr now.
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Old 11-12-2010, 03:31 PM
 
Location: Boise, ID
8,047 posts, read 25,417,951 times
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Quote:
Originally Posted by mortimer View Post
I would say that's not true.

If you split up the payment into 1/2 on the 1st and 1/2 on the 15th,
then you are applying less principle on the 1st, so more principle gets
the compounding from the 1st through the 14th.

There is no difference in principle applied after the 15th - other than
the accrued interest from the 1st through the 14th. Timing is everything.

If you pay all the principle on the 1st of the month -
you get more benefit. If you pay extra princple - better.

I can't imagine any bank not compounding daily.
Maybe there are some, but the calculation is so trivial ...
Ah, but that is assuming you have the $1000 up front. If you don't have $1000 today, but do have $500, and can start the process sooner by starting with $500, and doing that every 2 weeks, then you DO get the benefit. As you say, timing is everything.

What you said is true though, if you are going to start on a given day regardless, and either will pay $1000 now or $500 now and $500 in half a month, the better choice is $1000 now.

It all depends on the specific circumstance. But obviously the more you can pay and the earlier you can pay it, the more you will benefit.

Quote:
Originally Posted by manderly6 View Post
I know when I set up my twice a month payment I asked this very question about saving on interest for half of the month. I was told that what was happening in reality was over the course of the year I was making one extra payment and that would then be applied in one shot once a year. So it had no bearing on monthly/daily interest savings and would have the same exact impact as just making a one time extra payment each year of a single payment.

Or at least that is how I remember it. It's all a blurr now.
This is, as I mentioned, a benefit of the "every two weeks" plan. You don't gain an extra payment by paying 1/2 the payment twice a month, you make 12 months x 2 = 24 payments. However, by paying every 2 weeks, you make 52 weeks / 2 = 26 payments, which equals one extra full payment per year.

*Edit* I'm not sure what you meant by the "that would then be applied in one shot once a year", since that isn't how it usually works. It gets you ahead 1/4 of a payment every 13 weeks (I think that is right). It would be slightly worse interest-wise than making one bulk extra payment for the year on January 1st, but slightly worse than making one bulk extra payment for the year on December 31st (12 months later). If your program was saving it up and making an extra payment at the end of the year, they weren't doing you any favors.
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Old 11-13-2010, 04:13 PM
 
995 posts, read 3,681,925 times
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Making additional principal on the first and on the 31st have different effect.

So you are better off making additional payments as soon as possible.

Sent from my SPH-D700 using Tapatalk
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