Saving Money on your Mortgage

Last week I got a $544 bill for my homeowners insurance. This came as a shock to my wife and I because we thought our house insurance was to be paid through our escrow account. Being the detective I am, I checked our mortgage statement and sure enough we had over $700 in our escrow account. So something wasn't quite adding up.

I decided to make a call to Wells Fargo to see what was up, and I'm glad I did. Turns out the letter they had sent saying we were responsible for our first year's home owners insurance was sent out by mistake. The gentlemen apologized for the mistake and said he would send out payment to my insurance company first thing. He even called my insurance company to let them know what had happened.

While I had him on the phone I decided to ask about some fluctuations I had been seeing in my mortgage payment. It had been about $20 lower in the previous two months, but this month it was back up to normal. He transferred me to a young lady who explained to me that I had leftover escrow money from last year and they had applied that to my first two bills of the new year. She then proceeded to ask me if I was interested in saving thousands of dollars in interest and cutting years off my mortgage. I said, "You have my attention".

She told me by switching from a monthly payment to a bi-weekly payment I could save $30,000 in interest and cut my 30 year loan into a 24 year loan. Normally I would be skeptical by this, but I had heard before that you could save money by doing this. It essentially is the same thing as making an extra payment a year. If you pay every two weeks, in a year you'll have made 26 fifty percent payments. This means you end up making 13 full payments in the year, compared to 12 payments by paying monthly. Lets look at the savings.

Savings

On a $100,000 thirty year mortgage you'd pay $127,000 in interest only, plus the 100,000 principal for a total of $227,000. By paying every two weeks you'll end up paying roughly $97,000 in interest for a savings of $30,000. The bigger the mortgage the bigger the savings. On a $200,000 mortage you'll pay $255,000 in interest, for a total of $455,000. By paying every two weeks you'd pay roughly $194,000 in interest for a savings of over $60,000.

It sounds like a no brainer, right? And for me it was, but there are some things to look out for when deciding to do this. I'll tackle those in my next post. In the meantime has anyone else done this? If so how has it worked out for you?