Mortgage, Car Payments, Credit Cards: How to easily pay less interest and more principal...

Alabamacoastie

Alabamacoastie

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A few days ago, I had a talk with a friend who is a finance manager at a big name car dealer.

She told me something I've never heard before and I wanted to pass it on to all of you...

She said that when paying car payments, mortgages, and credit card payments we should always pay the monthly bill in two payments. Breaking each monthly bill into two smaller payments will save us a lot of money in the following ways:

1. Most people think there are 12 months (each containing 4 weeks) in a year... This is wrong.

Each year contains 52 weeks. When divided by 4 you get 13 individual 4 week periods. By paying half your mortgage on the 1st first day of the first week and the other half on the first day of the second week, you will end up paying 13 full mortgage payments each year, instead of 12.

2. She told me that you can make multiple payments each month, but these companies are only legally allowed to charge interest on one of the payments. Breaking your monthly bill into two separate payments forces them to lose money for interest and put more of your money toward the principal.

For example, let's say your monthly mortgage bill is $1500. Let's say you pay one monthly payment of $1500; the bank puts $1000 toward the principal and keeps $500 as interest. But, if you pay $750 on the first week and $750 on the second week, the bank can only charge interest on the first payment. Now you are paying $1250 to principal and only $250 to interest. Over the course of a 30 year loan, you can shave up to 11 years off your mortgage because you are paying more to principal and less to interest.

I've done some googling, and everything I've seen says she's right... As long as you are paying your debt to a reputable company. It's not going to work when you finance a car through Bobby, down the road, who sells $1000 junk cars in his front yard. And this ain't gonna work on Sal the bookie...

I'd like to hear from you guys. Have you tried this? Did it work? Any other nuggets of advice to save money and pay off debt faster?
 
Alabamacoastie said:
A few days ago, I had a talk with a friend who is a finance manager at a big name car dealer.

She told me something I've never heard before and I wanted to pass it on to all of you...

She said that when paying car payments, mortgages, and credit card payments we should always pay the monthly bill in two payments. Breaking each monthly bill into two smaller payments will save us a lot of money in the following ways:

1. Most people think there are 12 months (each containing 4 weeks) in a year... This is wrong.

Each year contains 52 weeks. When divided by 4 you get 13 individual 4 week periods. By paying half your mortgage on the 1st first day of the first week and the other half on the first day of the second week, you will end up paying 13 full mortgage payments each year, instead of 12.

2. She told me that you can make multiple payments each month, but these companies are only legally allowed to charge interest on one of the payments. Breaking your monthly bill into two separate payments forces them to lose money for interest and put more of your money toward the principal.

For example, let's say your monthly mortgage bill is $1500. Let's say you pay one monthly payment of $1500; the bank puts $1000 toward the principal and keeps $500 as interest. But, if you pay $750 on the first week and $750 on the second week, the bank can only charge interest on the first payment. Now you are paying $1250 to principal and only $250 to interest. Over the course of a 30 year loan, you can shave up to 11 years off your mortgage because you are paying more to principal and less to interest.

I've done some googling, and everything I've seen says she's right... As long as you are paying your debt to a reputable company. It's not going to work when you finance a car through Bobby, down the road, who sells $1000 junk cars in his front yard. And this ain't gonna work on Sal the bookie...

I'd like to hear from you guys. Have you tried this? Did it work? Any other nuggets of advice to save money and pay off debt faster?
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I believe Dave Ramsey and others suggest this. I've heard it my whole life..but don't know many that do.. including myself.
It definitely takes financial discipline and most probably like to write one check and it's done method...it's paid for the month.


DS
 
Just be careful when late fee kicks in on mortgage, credit card, etc....
 
I’ve heard this and never looked into it.....That some companies will hold the payment if it’s not a full payment until the second one is made, then Put the total amount due towards the P + I in one lump some. If that is the case you aren’t getting ahead.


Sent from my iPhone using Tapatalk
 
22Rimfire said:
I’ve heard this and never looked into it.....That some companies will hold the payment if it’s not a full payment until the second one is made, then Put the total amount due towards the P + I in one lump some. If that is the case you aren’t getting ahead.


Sent from my iPhone using Tapatalk
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my mortgage is with NCSECU and I don’t think they will let you do it.
 
I'm gonna have to call BS on the interest math here. Interest is calculated on your principle and will be the first thing that gets paid. That first 1/2 payment might 100% go to interest with you still owing more, depending on where you are in your loan. The only real benefit to making a 1/2 payment every two weeks is that you make one additional full payment each year. But you still have to watch the timing and due dates.
 
Catfish said:
I'm gonna have to call BS on the interest math here. Interest is calculated on your principle and will be the first thing that gets paid. That first 1/2 payment might 100% go to interest with you still owing more, depending on where you are in your loan. The only real benefit to making a 1/2 payment every two weeks is that you make one additional full payment each year. But you still have to watch the timing and due dates.
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Yeah I don't see that working for a mortgage payment either. The interest rate is indeed applied to the principal and not the monthly payment.
 
I just make bigger payments once a month.

On simple interest loans like the car or motorcycles I just double or triple up when I can. On the mortgage, we mark an additional amount towards principal every month.
 
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For mortgages it's real, but not as amazing as your math shows.

Our old loan processor (citiwide? I can't remember) had this thing called the "bi-weekly advantage program" where basically you could pay them for the privilege of having them deduct two payments per month for your mortgage instead of one. Or, you can do what we did and just setup auto-pay to pay half in the middle and half at the end of the month. Cost exactly $0 to do that, and saved us interest. It took me a long time to figure out to do it, but if I had to go pay for something on credit now I would start doing it on day 1.
 
The entire point #2 is incorrect. It makes no sense.

_Currently_ due interest is paid first, period. They aren't allowed to apply extra payments to _future_ interest. (Many banks used to do that, so paying extra paid future interest instead of principal - which should have been criminal and now is.)

Even if #2 was true (and it is not), unpaid interest from month 1 would a) incur a late fee, and b) be added to principal and just paid in month 2 anyway, defeating the entire purpose.

Simpler to just add 1/12 to your normal payment to get the benefit of 13 payments per year.

One thing that works VERY well, especially early in a loan with interest is a relatively large portion of the payment is to print out an amortization table. Then, each month, pay the interest due from the current row in the table, and as many months of principal as you can afford - maybe 2, maybe more, maybe a lot more. Let's say you pay off 3 months of principal (2 extra) in month 1. Mark off the first three months. They are done. Those interest payments have vanished. Month 2 you look at the table, and pay the interest for month 4, and 2 or 3 more of principal, and so on.

The big advantage here, for some people at least, is the motivation factor - you can just mark off extra months and see the interest vanish and the remaining time on the loan shrink. Later in the loan this is harder because the principal is a much bigger portion of each payment (but with inflation, maybe your income is higher).
 
US Bank has some kinda policy in place that prevents you from doing anything but pay your mortgage when it's due. I've tried, and talked with them about it when it got things screwed up.

Besides, there is a mortgage schedule that says what interest is due, and what principle gets paid, for each month.
 
skiles said:
Now I know why my mortgage company won't let you do partial payments. I always wondered. I put some extra towards principal each month, hopefully that will help a bit.
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That's what we do too. I think we make roughly the equivalent of 1.5 extra payments over the course of a year. It has taken about seven years off the mortgage by the current math, but it's a bit hard to know exactly because we refinanced twice over the first 15 years.
 
Depends on the loan. For simple interest loans this works. Think of it as paying interest on whatever the principal is. If you pay $10 interest and $90 on the principle every two weeks then you are paying off faster and paying less on interest. This is due to having less outstanding to pay interest on when its calculated monthly.

Some loans are $x for 72 months. Paying it off early does nothing. Some tractor dealers do this when you get a 0% loan.
 
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My last car loan was super sketchy with additional payments IMO. THEY decided where the extra money would go. Unlike all the other loans I have had where extra went on the principal. This one would apply it to the next payment. Initially I tried to get my wife to make 2 payments. She didn't want to bother. Next thing you know we are 4 months ahead on payments and the freaking principle is nearly unchanged. I was pissed. She started making one payment for the monthly bill. Then a few days later making a principal payment.

And I asked if it was a simple interest loan and was told yes. So if you think that's what you have, pay attention to what they are doing with your money.
 
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My two cents (not an professional or expert, please take everything with a grain of salt and educate me) The best thing to do now is refinance if you haven't done so recently. Don't pay out of pocket. Instead, put everything in the loan. Rates are so low now, the government is taking the risk of inflation out of your hands. With national debt in the tens of trillions, printing money is the only logical way. You'll want to owe money when it's getting diluted.
 
df0101 said:
My two cents (not an professional or expert, please take everything with a grain of salt and educate me) The best thing to do now is refinance if you haven't done so recently. Don't pay out of pocket. Instead, put everything in the loan. Rates are so low now, the government is taking the risk of inflation out of your hands. With national debt in the tens of trillions, printing money is the only logical way. You'll want to owe money when it's getting diluted.
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I just refinanced my home and 30 acre property at 2.25% with a VA IRRL.

My monthly payment dropped by $500 a month and, if I did the math right, I'll save over $200,000 in interest payments over the life of the loan.

I also got to skip 2 payments, and I got a refund of $2300 from the old escrow account.
 
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Alabamacoastie said:
I just refinanced my home and 30 acre property at 2.25% with a VA IRRL.

My monthly payment dropped by $500 a month and, if I did the math right, I'll save over $200,000 in interest payments over the life of the loan.

I also got to skip 2 payments, and I got a refund of $2300 from the old escrow account.
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I've got a nice 3.625% and I'm currently in process to refinance mine as well. I hope I get one as good as yours!

Thanks to Dave Ramsey, the only things we owe on are the house and my wife's minivan. :)
 
I’m also calling BS on your explanation/understanding of how interest is calculated and how making split payments works. Interest is calculated based on the principal of the loan, your payment has nothing to do with it. If you look at your amortization schedule, you’ll see that your interest paid far outweighs your principal paid for each monthly payment for quite a few years. So in your example of a $1500 payment split in half, normally it would be about $1k interest and $500 principal. If you make an extra payment at any time, or pay the loan differently than prescribed on the amortization schedule, that schedule is no longer accurate because you’ve invalidated one of the assumptions.

The bank will always pay the interest first and in most cases when making extra payments, you have to tell the bank to apply that payment to principal.
 
Alabamacoastie said:
I just refinanced my home and 30 acre property at 2.25% with a VA IRRL.

My monthly payment dropped by $500 a month and, if I did the math right, I'll save over $200,000 in interest payments over the life of the loan.

I also got to skip 2 payments, and I got a refund of $2300 from the old escrow account.
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And yet you still haven’t posted a picture of a new smoker? That is just sad.
 
CZfool68 said:
And yet you still haven’t posted a picture of a new smoker? That is just sad.
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I KNOW!!!

I still haven't bought one.

The $500 a month we save on the mortgage is going to my new tractor payment.

The escrow refund and the two dropped mortgage payments will buy the downstairs AC unit that recently went out.

And most of the money in savings is going to pay for a new shingle roof on our house (about $20,000 I think).
 
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Alabamacoastie said:
I KNOW!!!

I still haven't bought one.

The $500 a month we save on the mortgage is going to my new tractor payment.

The escrow refund and the two dropped mortgage payments will buy the downstairs AC unit that recently went out.

And most of the money in savings is going to pay for a new single roof on our house (about $20,000 I think).
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Who needs a roof when you have no smoked ribs?
 
My advice is to invest all that you have into a military surplus tank or armored personel carrier. And then any remaining funds into modifying it into a functional fighting vehicle. You will be the envy of all your neighbors, the scourge of the home owners association, and a hero to the common man. And when the bank comes calling for your repayment...you have a tank...
 
B00ger said:
My advice is to invest all that you have into a military surplus tank or armored personel carrier. And then any remaining funds into modifying it into a functional fighting vehicle. You will be the envy of all your neighbors, the scourge of the home owners association, and a hero to the common man. And when the bank comes calling for your repayment...you have a tank...
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I had a friend who years ago bought a trailer. He was going to put it on some property he owned in southwest Virginia as a little hunting lodge. He always said that it was free because he wasn't going to make payments...every month he'd hook it up and just move it somewhere where they could not find it to repo it. Of course he was joking, but the tank thing reminded me of that: you can't repo it if you can't find it.
 
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Chuckman said:
I had a friend who years ago bought a trailer. He was going to put it on some property he owned in southwest Virginia as a little hunting lodge. He always said that it was free because he wasn't going to make payments...every month he'd hook it up and just move it somewhere where they could not find it to repo it. Of course he was joking, but the tank thing reminded me of that: you can repo it if you can't find it.
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A couple weeks ago, I took my mom to a trailer lot that also sells tiny homes. She's going to buy one and have it installed on my property so that she can spend more time with her grandkids and I can help her through the next 30 years.

Anyway, I found out that they now put LoJack systems on all the trailers and tiny homes just for this exact reason.

My mom is paying cash for hers. The guy looked at me funny when I told him not to have one installed because I don't like to be tracked... Since it's already paid for, he agreed.
 
Alabamacoastie said:
A couple weeks ago, I took my mom to a trailer lot that also sells tiny homes. She's going to buy one and have it installed on my property so that she can spend more time with her grandkids and I can help her through the next 30 years.

Anyway, I found out that they now put LoJack systems on all the trailers and tiny homes just for this exact reason.

My mom is paying cash for hers. The guy looked at me funny when I told him not to have one installed because I don't like to be tracked... Since it's already paid for, he agreed.
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Edited to remove off topic content.

But thats awesome!
 
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