“This tip could literally save you THOUSANDS.”

Accurate?

Well, let’s dive into that.

A friend recently sent me an Instagram Reel where a gentleman shares a tip that promises to “literally save you thousands” on your mortgage. His tip? Pay your mortgage twice a month. He claims that by splitting your payment—so if your payment is $4,000, you pay $2,000 on the 1st and $2,000 on the 15th—it “eats away at the principal.” According to him, this trick could save him $400,000 in interest over the life of his loan.

Is this true? Yes and no.

Why Paying Twice a Month Won't Save You $400,000

First off, while paying earlier could reduce your interest, this specific tip might not be the best strategy. Here’s why: Mortgage companies typically won’t apply that first half-payment to your principal immediately. They’ll just hold it until they have the full payment, meaning you won’t see the benefit of early payment on your principal balance. It’s an administrative hassle for them, and it won’t save you anywhere near $400,000 in interest.

The Real Trick: Bi-Weekly Payments

Here’s where things get tricky—he’s actually misrepresenting the concept! The tip he’s talking about, paying on the 1st and the 15th, refers to semi-monthly payments (two payments per month on fixed dates). But what he meant to say was bi-weekly payments.

With bi-weekly payments, instead of making 12 monthly payments, you’re making 26 payments a year—essentially, one extra full mortgage payment annually. This can make a significant dent in your mortgage principal and shorten your repayment period, a strategy widely recommended in financial literacy education.

How Does This Save You Money?

Making 26 bi-weekly payments instead of 12 monthly payments helps reduce your interest over time because that extra payment goes directly to your principal. By doing this, you’re not just making your payments more frequently, but you’re reducing the overall interest you’ll pay over the life of the loan. It’s a small adjustment, but it can result in significant financial savings.

Let’s break it down:

A $700,000 mortgage at a 7.1% interest rate would cost about $1,000,000 in interest over 30 years.
The monthly payment would be approximately $4,700.
If you made bi-weekly payments or added one extra payment of $4,700 annually, you’d reduce your interest and pay off your mortgage several years early.

An Easier Strategy: Increase Your Monthly Payment

If the bi-weekly payment schedule sounds too complicated (and let’s face it, most mortgage companies don’t encourage it because it’s an administrative nightmare), there’s an even easier way to save on your mortgage: Increase your monthly payment by 1/12th of your regular payment.

In the above example, this means adding about $400 to your monthly payment, ensuring it’s applied directly to the principal. By doing this, you could save yourself around $250,000 and pay off your mortgage 6.5 years early. It’s not the $400,000 he was talking about, but it’s still a pretty great deal for your financial wellness.

Why Banks Don’t Like This Strategy

Banks typically discourage strategies like bi-weekly payments or extra monthly payments because it shortens the loan term and reduces the total interest they earn. However, as a savvy borrower, this is where your personal financial literacy can pay off. Understanding how to manage your mortgage effectively can save you hundreds of thousands of dollars in interest, freeing up more money for other financial goals, like investing in low-cost index funds or building a high-yield savings account.

Ready to Try It?

If you want to take advantage of this tip, just make sure your extra payments are applied to the principal, not interest. This strategy will help you pay down your mortgage faster, save on interest, and build financial wealth over time. Want to run the numbers for yourself? Email me, and I’ll send you my excel model to calculate your potential savings!

Questions, thoughts, or curious about how to save more on your mortgage? Email us at casey@your-orchard.com! We're here to help you navigate your personal financial literacy journey.

How to Save Hundreds of Thousands on Your Mortgage: The Truth About Bi-Weekly Payments