I recently received this question from a reader through the contact page of the site and thought that I would post my response right here on the blog for everyone to see. If you have questions that you would like me to tackle, feel free to contact me through the site or send an email.
My wife and I both get paid on the 15th and 30th, and I was thinking we should split out mortgage payment in half each paycheck. Our net paychecks each pay period are $3,360 and our monthly mortgage payment is $2,318. Our bank will allow us to submit semi-monthly payments. Should we do this to balance out the budget?
Balancing Your Budget Is Always A Great Idea
A semi-monthly mortgage payment option can be a great way to smooth out your budget like you mentioned. Most Americans get paid twice a month but have large bills in one week or another that must be paid. Slitting out those bills can be a big help. One drawback maybe the additional crunch you will feel on the month of your switch. You might want to build up a little cash cushion in your account to help pad for the volatility until everything settles back to normal. I use this method in my systematic investing by splitting my dollar cost averaging allocations between two paychecks.
Consider Bi-Weekly Mortgage Payments
I would also recommend that you check out the bi-weekly option where you pay every two weeks. You will end up making one extra mortgage payment per year (52 weeks/2 = 26 half payments, 13 full payments). You can pay off a 30 year fixed mortgage in as little as 22 years using this method. One drawback though is that the bi-weekly payment method could potentially mess up your budget because two months out of the year, you will make 1 1/2 mortgage payments because some months have more weeks in them.
Only Use 25% Of Your Take Home Pay For Mortgage
One thing that I saw from your budget that I wanted to bring to everyone’s attention is that you currently spend 34.5% of your monthly take home pay on your mortgage. This is a little high which could indicate that you have a mortgage that may be unsustainable for your income level. The common rule of thumb that a lot of financial planners use is that only 25-35% or less of your take pay should be used for a mortgage. This includes all taxes, insurance, PMI, principle, interest, and other fees associated with your mortgage.
But, you asked specifically about semi-monthly payments where you will still make 12 monthly payments or 24 half payments. This is a great method to smooth out your budget, but it won’t help you pay off your mortgage any faster than normal. I hope this helps. If anyone else has any questions about paying off their mortgage early or any personal finance questions, please feel free to email me directly at Hank [at] HankColeman.net.
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Bi-weekly mortgages are scams dreamed up by banks and other financial shops to get people to send more money that banks can keep around to earn interest. Unless your bank still owns the mortgage it created, it might be months before your extra payment is credited to your mortgage.
Create your own “bi-weekly” mortgage by simply dividing your monthly payment by 12 and sending that amount in a separate payment marked “Extra Principal Payment”, along with your regular monthly mortgage payment. This way, you are in control and won’t be obligated to your bank to make the extra payments. If you make your payments electronically, you should be able to set this up, too.
While I do not think bi-weekly mortgages are a scam, I can see your point and worry about the correct amount not posting quickly enough to your mortgage loan account.
I am also a big fan of dividing by 12 and sending in an extra payment. I do this with my own mortgage. Instead of sending a separate check though, I tack the 1/12th extra payment portion on to my normal loan minimum amount. But, I check religiously that my 1/12th payment was credited solely to principle and not interest.
Maybe “scam” is a harsh word, but considering all the companies that sprung up to offer these “mortgages” and fees they charged for this “disservice”, scam comes to mind.
I always specify that a separate and distinct principal payment be made because I keep reading about banks/servicing companies that take the extra payment and apply it to the next month’s payment, instead. This seems to occur especially if the extra payment is not sent along with the normal mortgage payment.
Maybe “scam” is a harsh word, but considering all the companies that sprung up to offer these “mortgages” and the relatively high fees they charged for this “disservice”, scam comes to mind.
I always specify that a separate and distinct principal payment be made because I keep reading about banks/servicing companies that take the extra payment and apply it to the next month’s payment, instead. This seems to occur especially if the extra payment is not sent along with the normal mortgage payment.
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