March 3, 2004 Transcript
On March 3, David discussed how you can discover how to save thousands on your mortgage! Read the transcript below from this week's show:
Soledad: When it comes to buying a home, conventional wisdom says the best possible tax deduction is just that. David bach says those are mortgage myths, and he wants to debunk them during our new weekly series called "90 second tips."
David: You buy a home, it will be the best investment you will make in your life. But you don't buy a home for the tax deduction, you buy a home to live in it. And the idea that you should pay for a mortgage all your life so you can get a tax deduction, the idea you should spend $100 and save 30, is ridiculous, those people are wrong.
Soledad: How about the 30-year mortgage is good debt. A mortgage is good debt?
David: That is true, I think a mortgage is good debt but you want to pay it off sooner than later. I'm fine with the 30-year mortgage, but I don't want you to pay for it over 30 years. If you buy a quarter of a million dollar home right now and pay for that home over 30 years, that home is going to actually cost you in excess of $600,000.
Soledad: In interest?
David: Well, total, you are going to have over $400,000 of interest payments. I want to share a secret. The secret is a tool called the bi- weekly mortgage where you take your 30-year mortgage and you can cut it down between 25 and 30 years, we have an example here, where you have a $250,000 mortgage at 8% interest on a 30 year term, your monthly payment, $1,834.Total interest, $410,000. Now taking that exact same mortgage and break that mortgage payment in half, paying $917 every two weeks, have your mortgage company set this up for you, now your interest is only going to be $291,000, and you will pay it off in it 23 years. It's the same amount you are paying in a month, you are just paying it every two weeks.
Soledad: Total savings is cutting seven years off that mortgage. Now, you say, talk to your mortgage company. You can't pop a check in the mail.
David: You can't, they won't take your mortgage payment that way, so there is a catch, when you call your mortgage company and tell them you want a bi-weekly mortgage, on average, it's $290 to set this up and it runs $5 a month. And over the life time of your mortgage, you would spend $1,200 on this system, but you would save $119,000. And critics say why would i pay someone to do this for me, when i can make extra mortgage payments, and you can do that, but let's be honest, most people don't. Most people don't write extra checks to the bank, and most don't pay extra payments on the mortgage, and if they do. The mortgage companies didn't apply it to the principal. It's an automatic factor, when you do it this way, you don't think bit and the average person watching will save over $46,000 in interest payments and cut five years off your mortgage in doing this.