Dollar Debrief some Mortgage Myths

I hate to say it, but if you live in the south, Spring is gone. Summer, and all its humidity, is here. My dad always says humidity is “life giving.” Big talk coming from a guy who has never lived in an oppressively humid place.

Home ownership is really just a government psyop to encourage people to have more kids and cut their grass, but that’s a different rabbit hole. We’ve talked about mortgages a lot on the Dollar Debrief because they are a quintessential aspect of American life and huge financial commitments. 

We’ve covered the hidden costs, the rent v. buy dilemma, and options following your purchase. If you are thinking of buying a home and want the spark notes - home ownership is twice as expensive as you think then double it again; renting isn’t a bad financial decision, in fact, it could be the smarter one. 

If you’ve already bought a home, you’re probably realizing that 30 years is way longer than you thought. You’ve also probably heard several different myths about your mortgage. So let’s get into them!

Split your mortgage in half and make two payments a month to cut years off!

This one is probably the most popular because it’s the simplest way to get a big result. For this method to work, you have to make half payments every TWO WEEKS, not twice a month. This seemingly small detail makes the difference. But Wilson, there are four weeks in a month! What is the difference between every two weeks and twice a month?

Yes, there are four weeks each month… plus a little - except February (3/4ths of the time). Why is our calendar this way…  

With 52 weeks in a year, a half payment every 2 weeks is 26 half payments or 13 full payments! A half payment, twice a month would lead to your standard 12 full payments a year.

You can cut off 5 years and thousands off interest with this method. If you have a $300,000 loan and 6% interest rate, a half-payment every two weeks will save you over $74,000 in interest. You can ask Chat GPT to run the numbers on your specific mortgage.

A similar concept is making one additional full payment per year directly to your principal. I originally thought that was a better way since it goes only to principal instead of principal and interest. Chat GPT helped me understand why a half-payment every two weeks is actually slightly better.

When you make more frequent payments even while paying the interest, you cut the principal down slowly but surely. 

If you have a 30-year fixed rate mortgage, your monthly P&I (principal and interest) payment is fixed. Each time you make a payment, the amount that goes to interest is dependent on your outstanding principal balance. When you make a payment every two weeks, the next payment benefits from a slightly lower principal balance which increases the amount that goes to principal. When you compound this every two weeks for years plus the additional payment, the differences add up.

So if you want to follow this method, keep in mind that you will be making 13 payments and will have two months with three half payments. If you are not prepared, this could cause a problem. Also make sure that additional payments go to your principal, not your escrow account. If your additional payments end up in your escrow account, you’re just handing your lender money.

You should refinance whenever you can get a lower rate.

As much as it hurts me to say this, the cold caller offering you a lower rate doesn’t actually care about your monthly payment. All they care about is getting you to sign a new loan so they can receive all their fees. You getting a lower monthly payment is just the sales pitch for them. 

I am not saying never refinance, but you should be extremely skeptical of anyone getting paid to call you at random. A lot of the time, they run potential numbers based on your outstanding balance and new interest rate. They do not include all the closing fees that will be added to your balance, killing your potential savings if the new interest rate isn’t that much lower.

If you are excited by a lower rate, I would recommend requesting a full breakdown from the loan officer (not the salesperson) on the cost to refinance. You may be surprised at how different the sales pitch is from reality.

A refinance also resets your 30-year countdown. If you are working hard to pay your loan off early, a refinance does restart your hard work. However, if you refinance but continue paying the same amount towards your loan, you could pay your mortgage off even faster.

Bottom line, be very cautious whenever you are cold called to refinance. If they didn’t make money, they wouldn’t be calling you. 

You should pay off your mortgage ASAP

This may seem contradictory since I started by explaining a way to pay off your mortgage early, but I don’t think you need to pay off your mortgage early - depending on your interest rate.

Your rate of return for paying off your mortgage early is equivalent to your interest rate. If you pay off $1,000 of your mortgage, you avoid paying the interest on that $1,000 per year. If you have a 2.5% COVID mortgage, you could make more money by putting that additional money into a money market fund returning 4% right now. If you have a >6% mortgage, paying off early may be the right call.

At the end of the day, this debate is highly personal. If you value having no debt, then paying off your mortgage could be right for you regardless of the numbers.

What other mortgage questions do you have? What myths or theories did I miss?

Debrief on Deck

Next week is our monthly market debrief for April. I have tried my hardest to find news stories that don’t involve Trump… It’s not easy right now.

As always, please reach out to us with any questions or comments you have. You can reply directly to this email or find us on Instagram.

Until then, stay the course.

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