Hello, my friends and welcome to another episode of Ask Marco where I answer your investing related questions.
Today’s question comes from Sandesh and he says, hi Marco. I have heard you and other REI experts talking about making a biweekly payment on your mortgage. I get the reasoning behind it and that is to get an extra payment over the course of 52 weeks. I wanted to know if someone is already paying down the extra principal on a monthly basis to splitting it into two payments. Make sense? His example here is if the amount due is $600 every month and he’s paying $600 plus $50 extra in principle towards that principal and interest payment on the first of every month is splitting it into two equal payments of $325 each every two weeks better. As always, I appreciate your help and keep that awesome content coming through. Thank you.
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This is a very good question and it’s really a question of whether you should be making monthly or biweekly payments. In fact, really you can pay off your mortgage in any way you choose. You can make additional bonus payments during the course of the month thru the year. You could do biweekly. You can even do weekly payments if you wanted to. And what essentially is happening here is most people pay their mortgage off in monthly mortgage payments. So you’re essentially making 12 equal payments throughout the year, so 12 months, 12 payments. But if you enroll yourself through your lender in a biweekly payment program, what essentially you’re doing is you’re paying an extra month over the course of a 12 month year. So what happens is, is there’s 52 weeks in a year. So this works out to be 26 biweekly payments or in effect, it’s 13 monthly payments. And what happens is, is you’re just accelerating the payment of the principal, which lowers the amount of total interest paid over the life of the loan, which is the amortization period.
So essentially what you end up doing by simply changing over to biweekly payments is you’re lowering your mortgage by five years, so instead of a 30-year amortization, you’re going to have it paid off in approximately 25 years. So obviously if you run the math, depending on the size of your mortgage, you’re saving yourself interest and in many cases that can add up to be a lot of interest. Now is it worth doing this? Well that’s up to you if your strategy, if your plan with your investment portfolio is to accelerate the payments or get them paid off as soon as possible so you have a free and clear portfolio, therefore no debt service and therefore higher cash flows coming from your properties, then yes, this would make sense, especially if you have healthy cash flow coming in from your properties and you’ve got lots margin there.
Something as a side is referred to as the debt service coverage ratio and you might see this abbreviated from time to time as the acronym D S C R – Debt Service Coverage Ratio. This is actually pretty popular with commercial loans in the commercial space. But if you have a high enough debt service coverage ratio, then there’s no reason why you couldn’t do that because what you’re going to end up doing is you’re going to increase the equity in your property faster over time, short term and longterm by just accelerating the payment, which ultimately will end up being a more favorable for you than just a taking that cash flow from the property. The benefit of keeping the cash flow is really to save up, cross all of your properties in your portfolio to do one of two things. One is to accelerate the payments on your property. So you are in a position of having a large free and clear portfolio sooner or two, aggregate all that cashflow, pool it together and come up with the down payment for your next rental property as soon as possible.
So you’re essentially just saving all the cash flows to make up the next down payment for the next property. So that is assuming that you are in a growth or acquisition mode as opposed to um, uh, you know, employing a strategy where you’re trying to pay off your mortgages as soon as possible because you want to essentially have a free and clear portfolio for that passive income. So these are just two different strategies, but ultimately you need to make the decision of whether you just want to stick to the monthly payments or the biweekly payments or something else. I mean, just make bonus payments or uh, just pay chunks of cash. Just make sure that you don’t have any kind of penalty from your lender for the payment processing of making additional payments or switching to a biweekly program. Usually, there isn’t, but you should ask.
And of course, most loans have essentially what is known as a prepayment penalty. That’s not likely to affect you because you’re probably not going to have the mortgage paid off in three to five years using this strategy. So any kind of prepayment penalty won’t even apply. Anyway. I hope that made sense. Sandesh hope that answers your question. It was a good one. And I will cover another question here shortly. So thanks for listening. If you have any other questions about real estate investing or finance, just send them over to me. Click the ask Marco link on the Passive Real Estate Investing.com website. If you haven’t remembered to subscribe to this podcast, click that button. Subscribe, help us share the show with other likeminded people. Just visit us on iTunes or wherever you listen. Leave us a rating and review. Always greatly appreciated. Yes, I read every single one and once again, thanks for listening. We will see you on the next episode.
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