Mortgage Savings: How You Pay Is More Important than What You Pay

Bimonthly is an ambiguous term, especially when compared to biweekly. The prefix bi can mean twice in one time period, such as biannual reports; or it can mean every two periods, like bicentennial celebration, or biennial review. I don´t know of any clubs that have "biweekly meetings," meeting twice a week. Yet quite a few meet "bimonthly," usually indicating twice in a month. Technically, bimonthly could also mean every two months.

We´re not just parsing prefixes here. This is important, because how you pay your mortgage is far more important when it comes to saving money than what you pay (interest rates).

Let me give you a couple of illustrations. Let´s look at the bimonthly payment structure in which half of a mortgage payment is made on the 1st and half on the 15th of the month. Regardless of the amount of the loan, assuming a fixed, 30-year rate, the realized savings will be about one month´s payment. Not bad, but not good either.

Comparing this arrangement of bimonthly payments to biweekly, meaning half a payment every two weeks regardless of when the month ends, there´s a savings differential of six or seven years, depending upon the loan and interest rates. In other words, a biweekly payment plan, as defined here and not counting setup and processing fees, can save the average homebuyer about seven years.

Here´s another mind-blowing comparison, especially in light of all the talk about subprime mortgages´ sinking U.S. and world economies. (Can you say securitized bundling?)

Homebuyer Stan gets an attractive 6 1/8th% fixed rate loan for 30 years. If Stan pays the $200,000 back as scheduled, he will also pay $237,712 in interest.

Unfortunately, the lowest rate Lucretia could get was 8%. Her $200,000 mortgage could cost her $90,600 more than Stan´s. Lucretia employed a biweekly pseudo payment schedule (meaning her house payment was applied to her loan only once a month, when a full payment was in hand). Ultimately, Lucretia paid $1221 less than Stan did. In other words, her strategy saved her almost the same as a 2% lower interest rate would have.

There are at least half a dozen ways to pay off your home years sooner. There is no one technique that is better than another for everyone. Your home is personal to you, reflecting your values and priorities, such as children, pets, solace, or beauty. So why should your mortgage payoff be "one size fits all"? The way you pay your mortgage can and should be as individual as you are.

My favorite technique cut $70,000 off our mortgage in only two years. Not counting regular payments. We used some creative money cycling—moving money from equity to home to checking, and back.—to reduce principal by $20,000, which in turn cut our scheduled interest payback by $50,000. (Kind of like the red person in the picture.)

That technique is fully explained and illustrated in the do-it-yourself manual Let Your Mortgage Make You Rich! Rules of the Lending Game Exposed, by John R. Barker. The manual also covers other ways, and combinations of ways, pay your mortgage—including using your house to help pay for your house. Methods and savings are compared. One size doesn´t have to fit all.