Many people ask me about different “money saving” or “wealth building” ideas they find and I’m very happy to be the go-to guy. If I don’t know the answer I can certainly find it!
Recently people have asked me about paying their mortgage “bi-weekly”. Typically people are convinced they can pay off their mortgage in a much shorter period of time without any real noticeable impact to their household budget. Who wouldn’t go for that? Certainly this sounds great, and for many people it can be just the thing to force the type of financial discipline that has eluded them in the past. Basically the value of a “bi-weekly mortgage plan” boils down to a person’s financial goals.
Anyone considering a more rapid payoff of their mortgage should consider the costs. There are actual costs and opportunity costs.
The actual costs consist of any monthly, annual, or per payment costs associated with the bi-weekly mortgage plan (there is almost always some kind of cost or no company would be marketing it); and of course, there is the fact that you’re actually making an additional payment each year, albeit it is spread over the entire year thus not as painful.
Now before the naysayers hit “reply” with their arguments, I’ll admit you can save a boatload of interest if you payoff your mortgage faster. However, as anyone who has lived with a shopaholic will tell you it’s not about how much you saved, but ultimately, what do you end up with? The real question to ask may be, “what do we want to accomplish with our money?” And that’s where opportunity cost comes in.
Opportunity cost can be described as what you missed out on in pursuit of something else. For instance, if you focus only on paying down your mortgage and thus can’t afford to take advantage of another investment opportunity, like buying real estate or a stock (for example), then the lost opportunity is the cost. Is that a bad thing? Again, it depends on the financial goal.
As for the “bi-weekly” mortgages, I think they are a waste of money in most cases. It seems that most people choose this over a structured and faithfully executed financial plan far too often. However, if you really want to accomplish the same thing without contracting with a third party, just add 1/12 of your payment to each monthly payment and have it auto-drafted from your account. This way, you maintain the control and achieve the same result without paying someone else to “help” you with it.
You may have identified your financial goals, but maybe you haven’t….yet! As we approach the end of the year how about reviewing or defining your financial goals? Perhaps you realize that you’re not pursuing those goals as effectively or efficiently as you could be. Do you have a 15 year mortgage that leaves you “house poor”? Or, do you have an “interest only” loan without demonstrating the discipline to invest the difference? Give me a call and we’ll talk about the alternatives available to you!
And please, keep those questions coming!