Editor’s note: The original version of this column contained mathematical errors in the sample calculation on payment of interest vs. principal reduction. We apologize for the errors. The article has been updated to delete these erroneous calculations.
DEAR BENNY: My lender just sent me a form notice suggesting that I can save a lot of money if I start making two mortgage payments each and every month. Does this make sense? –Jill
DEAR JILL: There is a trade-off on what is called a "biweekly" mortgage. Yes, you will save paying a lot of interest, but, depending on your tax bracket, your interest deductions will also be reduced.
Let’s take this example: You borrow $200,000 at 4.75 percent for 30 years. From the amortization table, you know that your monthly payment (excluding taxes and insurance) is $1,043. If you continue to pay this amount each and every month, on the 360th month you will have paid off your mortgage completely.
But let’s say that instead of paying monthly, you decide to make two payments each month. In effect, you are now making 13 monthly payments each year, which will reduce the number of years you have to pay down to between 22 and 25, instead of 30.