Double first mortgage payment?

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jstage
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Double first mortgage payment?

Post by jstage »

Hello,

We just closed on a new home and are approaching our first payment. Our loan advisor told us two things...1) Make a double first payment and 2) set up bi-weekly payments instead of once a month.

I can easily see/understand the math between the bi-weekly plan. However, has anyone ever heard of the double first payment? We do plan on staying in this home until retirement (25-28 years away) if that impacts anything.

We have the funds...just wondering if that is the best place to put them versus keeping them in our savings account or investing them.

Thank you!
exodusNH
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Re: Double first mortgage payment?

Post by exodusNH »

jstage wrote: Thu Mar 23, 2023 11:07 am Hello,

We just closed on a new home and are approaching our first payment. Our loan advisor told us two things...1) Make a double first payment and 2) set up bi-weekly payments instead of once a month.

I can easily see/understand the math between the bi-weekly plan. However, has anyone ever heard of the double first payment? We do plan on staying in this home until retirement (25-28 years away) if that impacts anything.

We have the funds...just wondering if that is the best place to put them versus keeping them in our savings account or investing them.

Thank you!
Usually to set up biweekly payments, you have to make a double payment. I don't know why.

But biweekly payments may not do what you think. By default, they will hold your partial payment until they have a full payment. Then, they'll apply the whole payment. Notably, this does NOT pay down the mortgage every two weeks. You're loaning the mortgage servicer 1/2 your payment every two weeks and receiving 0% in interest.

The biweekly payments are more of a budgeting tool than a principal acceleration plan. By paying every two weeks, your cash flow is smoothed. You also happen to make one extra payment per year.

It's is generally a better idea to simply make a single monthly payment with whatever extra you want. As long as you're not living paycheck to paycheck, you get to keep the interest instead of the bank getting it.
stoptothink
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Re: Double first mortgage payment?

Post by stoptothink »

exodusNH wrote: Thu Mar 23, 2023 11:11 am
jstage wrote: Thu Mar 23, 2023 11:07 am Hello,

We just closed on a new home and are approaching our first payment. Our loan advisor told us two things...1) Make a double first payment and 2) set up bi-weekly payments instead of once a month.

I can easily see/understand the math between the bi-weekly plan. However, has anyone ever heard of the double first payment? We do plan on staying in this home until retirement (25-28 years away) if that impacts anything.

We have the funds...just wondering if that is the best place to put them versus keeping them in our savings account or investing them.

Thank you!
Usually to set up biweekly payments, you have to make a double payment. I don't know why.

But biweekly payments may not do what you think. By default, they will hold your partial payment until they have a full payment. Then, they'll apply the whole payment. Notably, this does NOT pay down the mortgage every two weeks. You're loaning the mortgage servicer 1/2 your payment every two weeks and receiving 0% in interest.

The biweekly payments are more of a budgeting tool than a principal acceleration plan. By paying every two weeks, your cash flow is smoothed. You also happen to make one extra payment per year.

It's is generally a better idea to simply make a single monthly payment with whatever extra you want. As long as you're not living paycheck to paycheck, you get to keep the interest instead of the bank getting it.
All of this. I believe it is the norm that they just hold onto the partial payment (was the case for all three of our mortgage carriers); you are actually losing money (a few pennies) by tying it up in a non-interest bearing account for half a month. At the very least, check before setting it up.
barnaclebob
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Re: Double first mortgage payment?

Post by barnaclebob »

if you have the discipline and desire to pay extra towards your mortgage then don't bother with bi weekly payments, just pay your desired amount of extra principle each month automatically. Most people who are responsible with money probably prefer to budget monthly instead of per biweekly paycheck.
Apathizer
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Re: Double first mortgage payment?

Post by Apathizer »

barnaclebob wrote: Thu Mar 23, 2023 11:43 am if you have the discipline and desire to pay extra towards your mortgage then don't bother with bi weekly payments, just pay your desired amount of extra principle each month automatically. Most people who are responsible with money probably prefer to budget monthly instead of per biweekly paycheck.
I agree. Rather than bi-weekly payments, I think it makes more sense to increase principal payment with each regular monthly payment. That's what I did for a few years. In early 2022 I actually sold most of my taxable portfolio and used it to pay off most of my mortgage.

Since then I stopped making additional principal payments since the remaining balance is so low the interest I'm paying is minuscule. I'm in the process of selling my place, otherwise I would just pay off my mortgage entirely. If you can't do that, then additional principal payments are probably the next best thing. This is especially important early in the loan since the first several years most of what's paid is interest rather than principal.
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muddgirl
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Re: Double first mortgage payment?

Post by muddgirl »

When we bought a new car with a loan in 2011-ish (pre-boglehead days), we had the option at our credit union to pay biweekly. They weren't holding the partial payment, they applied it to principle + accrued interest every two weeks. So it did shorten the life of the loan and we paid less in interest. But I think planning for principal-only payments would do the same thing and give more flexibility.

It looks like some mortgage lenders offer a similar plan, but there may be an extra fee.
mortfree
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Re: Double first mortgage payment?

Post by mortfree »

Bi weekly is basically a scam - best thing you can do is start an amortization schedule in excel and track your payments.

Play around with extra payments and see what that does.

Seems like bad advice from the loan advisor
Last edited by mortfree on Thu Mar 23, 2023 9:29 pm, edited 1 time in total.
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mhalley
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Re: Double first mortgage payment?

Post by mhalley »

I would recommend making an amortization spreadsheet to monitor your loan balance to ensure the extra payments are credited properly.
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enad
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Re: Double first mortgage payment?

Post by enad »

My thoughts would be to pay whatever extra you can when you can and so long as you are paying extra each time you will shorten the loan and the amount of interest you pay.
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Re: Double first mortgage payment?

Post by placeholder »

Basically biweekly results in an extra payment per year so you could just do that or divide it by 12 and add the extra to each payment but there's little reason to do the biweekly especially if it's a service they charge you for.
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DeliberateDonkey
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Re: Double first mortgage payment?

Post by DeliberateDonkey »

jstage wrote: Thu Mar 23, 2023 11:07 am We have the funds...just wondering if that is the best place to put them versus keeping them in our savings account or investing them.
This depends on a lot of factors, but mostly the rate on your mortgage, any other itemized tax deductions you may have, and the expected after-tax rate of return on an alternative investment or other savings vehicle, assuming you have sufficient emergency funds.

Knowing none of that, I would suggest that you pay off your mortgage aggressively. I would also suggest that you make two payments, but not biweekly: One regular payment on the first of the month when it is due (ignoring grace periods) and one principal payment in the maximum amount you can reasonably afford at the end of the month. You will generally receive the same interest savings for the principal payment regardless of the time of month it is paid, so there is no reason to send it earlier.
Apathizer
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Re: Double first mortgage payment?

Post by Apathizer »

DeliberateDonkey wrote: Fri Mar 24, 2023 2:18 am
jstage wrote: Thu Mar 23, 2023 11:07 am We have the funds...just wondering if that is the best place to put them versus keeping them in our savings account or investing them.
This depends on a lot of factors, but mostly the rate on your mortgage, any other itemized tax deductions you may have, and the expected after-tax rate of return on an alternative investment or other savings vehicle, assuming you have sufficient emergency funds.

Knowing none of that, I would suggest that you pay off your mortgage aggressively. I would also suggest that you make two payments, but not biweekly: One regular payment on the first of the month when it is due (ignoring grace periods) and one principal payment in the maximum amount you can reasonably afford at the end of the month. You will generally receive the same interest savings for the principal payment regardless of the time of month it is paid, so there is no reason to send it earlier.
Wouldn't it be simpler to just include the additional principal payment with the scheduled mortgage payment? I mean if you pay the additional principal on say the last day of one month or the first day of the following month doesn't seem to matter. Additional principal payment with the scheduled mortgage is easy to set up so you don't even have to think about it.
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barnaclebob
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Re: Double first mortgage payment?

Post by barnaclebob »

mortfree wrote: Thu Mar 23, 2023 9:20 pm Bi weekly is basically a scam - best thing you can do is start an amortization schedule in excel and track your payments.

Play around with extra payments and see what that does.

Seems like bad advice from the loan advisor
Its not bad advice for everyone and is far from a scam. For people who have trouble saving and their home equity and maybe a 401k are their only real assets, it can be good advice. Anyone who makes it onto this forum likely doesn't need to do bi weekly payments though.
exodusNH
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Re: Double first mortgage payment?

Post by exodusNH »

barnaclebob wrote: Fri Mar 24, 2023 7:32 am
mortfree wrote: Thu Mar 23, 2023 9:20 pm Bi weekly is basically a scam - best thing you can do is start an amortization schedule in excel and track your payments.

Play around with extra payments and see what that does.

Seems like bad advice from the loan advisor
Its not bad advice for everyone and is far from a scam. For people who have trouble saving and their home equity and maybe a 401k are their only real assets, it can be good advice. Anyone who makes it onto this forum likely doesn't need to do bi weekly payments though.
I agree that it is not a scam, but you have to dig into the details to find that they hold your 1/2 payment in a non-interest-bearing account until the second payment arrives.

I feel that they offer this option because a true biweekly p&i payment plan really does reduce your principal faster. They're relying on the confusion between those two options. You do wind up making an extra payment per year, but that's almost incidental.
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SmileyFace
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Re: Double first mortgage payment?

Post by SmileyFace »

I never played any of these silly games with my mortgage - I always made the regular payments but would routinely log into the portal and make an additional Principal-Only payment. Luckily my bank had this as a payment options in their portal and the principal payment was exactly that - an immediate payment that was applied directly to principal. This way there was no confusion and no games of the bank holding the money and applying to some future payment.
Some of the rules they have and things they do seem so antiquated. My favorite was when I was ready to pay off the remainder of my mortgage and the bank insisted I couldn't do it through the portal but had to request the payoff amount and send them the cashiers check. I said "fine" - I paid off all but $50 through the portal - waited for that to clear - then requested the payoff amount.
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DeliberateDonkey
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Re: Double first mortgage payment?

Post by DeliberateDonkey »

Apathizer wrote: Fri Mar 24, 2023 2:41 am
DeliberateDonkey wrote: Fri Mar 24, 2023 2:18 am
jstage wrote: Thu Mar 23, 2023 11:07 am We have the funds...just wondering if that is the best place to put them versus keeping them in our savings account or investing them.
This depends on a lot of factors, but mostly the rate on your mortgage, any other itemized tax deductions you may have, and the expected after-tax rate of return on an alternative investment or other savings vehicle, assuming you have sufficient emergency funds.

Knowing none of that, I would suggest that you pay off your mortgage aggressively. I would also suggest that you make two payments, but not biweekly: One regular payment on the first of the month when it is due (ignoring grace periods) and one principal payment in the maximum amount you can reasonably afford at the end of the month. You will generally receive the same interest savings for the principal payment regardless of the time of month it is paid, so there is no reason to send it earlier.
Wouldn't it be simpler to just include the additional principal payment with the scheduled mortgage payment? I mean if you pay the additional principal on say the last day of one month or the first day of the following month doesn't seem to matter. Additional principal payment with the scheduled mortgage is easy to set up so you don't even have to think about it.
Simpler, yes, just talking about maximizing savings here. Paying down your principal on 3/1 versus 3/31 has the same result, but paying it on 4/1 will cost you a full month's interest on that amount. At least, that has been my experience with the way these payments are credited.

Years ago, maybe the difference wasn't worth it, but if you're on a fairly aggressive pay-down schedule (say, $1,000/month), wouldn't you rather hold those funds for an extra 30 days (earning ~4%) and still receive the same interest savings on your mortgage (costing ~7%) for the month?
Apathizer
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Re: Double first mortgage payment?

Post by Apathizer »

DeliberateDonkey wrote: Fri Mar 24, 2023 9:46 am
Apathizer wrote: Fri Mar 24, 2023 2:41 am
DeliberateDonkey wrote: Fri Mar 24, 2023 2:18 am
jstage wrote: Thu Mar 23, 2023 11:07 am We have the funds...just wondering if that is the best place to put them versus keeping them in our savings account or investing them.
This depends on a lot of factors, but mostly the rate on your mortgage, any other itemized tax deductions you may have, and the expected after-tax rate of return on an alternative investment or other savings vehicle, assuming you have sufficient emergency funds.

Knowing none of that, I would suggest that you pay off your mortgage aggressively. I would also suggest that you make two payments, but not biweekly: One regular payment on the first of the month when it is due (ignoring grace periods) and one principal payment in the maximum amount you can reasonably afford at the end of the month. You will generally receive the same interest savings for the principal payment regardless of the time of month it is paid, so there is no reason to send it earlier.
Wouldn't it be simpler to just include the additional principal payment with the scheduled mortgage payment? I mean if you pay the additional principal on say the last day of one month or the first day of the following month doesn't seem to matter. Additional principal payment with the scheduled mortgage is easy to set up so you don't even have to think about it.
Simpler, yes, just talking about maximizing savings here. Paying down your principal on 3/1 versus 3/31 has the same result, but paying it on 4/1 will cost you a full month's interest on that amount. At least, that has been my experience with the way these payments are credited.

Years ago, maybe the difference wasn't worth it, but if you're on a fairly aggressive pay-down schedule (say, $1,000/month), wouldn't you rather hold those funds for an extra 30 days (earning ~4%) and still receive the same interest savings on your mortgage (costing ~7%) for the month?
If the amount is the same I don't think there's any significant difference between paying on say 03/31 or 04/01. If/when someone is paid in say the middle of the month and uses some of that for additional principle payment, then consistently doing so will also reduce total interest paid and shorten the duration.
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David Jay
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Re: Double first mortgage payment?

Post by David Jay »

jstage wrote: Thu Mar 23, 2023 11:07 amHowever, has anyone ever heard of the double first payment? We do plan on staying in this home until retirement (25-28 years away) if that impacts anything.
Early principal payments can significantly shorten the duration of a mortgage. The first few years of a 30 year mortgage are almost entirely interest, so immediately putting a few thousand on the principal can shorten the loan duration by years.

I gave my son $2000 (almost 2 month’s payment) to immediately put on his new mortgage when he purchased his starter home in 2020.
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Re: Double first mortgage payment?

Post by David Jay »

duplicate post
Last edited by David Jay on Sat Mar 25, 2023 8:05 am, edited 1 time in total.
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Re: Double first mortgage payment?

Post by the_wiki »

Paying a double first payment seems like an odd strategy because it implies you could have just made a larger down payment.

Paying half your payment every two weeks is a trick to get get an extra payment made over each year. You could also just pay 1/12 extra each month and end up at the same total payment.

With current rates, paying off your mortgage early is likely to be higher after-tax returns than investing, so any tricks that get you there are probably not bad advice.
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Re: Double first mortgage payment?

Post by exodusNH »

the_wiki wrote: Fri Mar 24, 2023 11:47 am Paying a double first payment seems like an odd strategy because it implies you could have just made a larger down payment.
This is sometimes a requirement to get on the biweekly payment schedule.
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Re: Double first mortgage payment?

Post by TropikThunder »

muddgirl wrote: Thu Mar 23, 2023 7:03 pm When we bought a new car with a loan in 2011-ish (pre-boglehead days), we had the option at our credit union to pay biweekly. They weren't holding the partial payment, they applied it to principle + accrued interest every two weeks. So it did shorten the life of the loan and we paid less in interest. But I think planning for principal-only payments would do the same thing and give more flexibility.

It looks like some mortgage lenders offer a similar plan, but there may be an extra fee.
Car loans and mortgages don’t work the same way.

Car loans (and other simple interest loans) apply the payment to the balance on the day it was made, and calculate the interest due off the average daily balance.

Mortgages don’t use average daily balance, they only use the balance as of the first of the month (regardless of when you pay). If you make your April payment early, you don’t save any interest because the only balance that matters is on the first.
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Re: Double first mortgage payment?

Post by the_wiki »

exodusNH wrote: Fri Mar 24, 2023 11:55 am
the_wiki wrote: Fri Mar 24, 2023 11:47 am Paying a double first payment seems like an odd strategy because it implies you could have just made a larger down payment.
This is sometimes a requirement to get on the biweekly payment schedule.
Correct me if I am wrong, but I thought the first "double" payment is generally just a regular monthly full payment as scheduled. It's only double relative to the 1/2 payments you will be making biweekly going forward.
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Re: Double first mortgage payment?

Post by martiansteeler »

barnaclebob wrote: Fri Mar 24, 2023 7:32 am Anyone who makes it onto this forum likely doesn't need to do bi weekly payments though.
I pay bi-weekly.

For ⅔ of my 25 years of working life, and especially the first 15, I was paid monthly, on the first of the month, not bi-weekly/twice-monthly. Just starting out, my budgeting was "pay all the bills and yourself, and what is left is what you have for the month". Even though I now make 10x what I did compared to when I started out, I could never wrap my head around budgeting when being paid bi-weekly/twice monthly (in fact, I hate it). When I was paid twice-monthly, I used the same mantra, pay my bills, and what is left is what I have. When I first bought in the Bay Area, I couldn't swing the whole mortgage on a single twice-monthly salary payment and have money left over for the next two-ish weeks. Now, it is no problem, but it is hard to change those ways.
TheHiker
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Re: Double first mortgage payment?

Post by TheHiker »

I never bothered with bi-weekly. Just made extra principal payments to accelerate.
Double first payment makes little sense. Why borrow more and then immediately pay it back?
But if you double all your payments, you will pay off 30-year 6% mortgage in 10 years (which is what we did).
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Re: Double first mortgage payment?

Post by cchrissyy »

oh! i never heard of a double first payment before but i bet the poster above is correct that it's actually a normal payment and we're only calling it double as compared to the new biweekly half payments.

i never liked the idea of two half payments. i can see how it makes sense to people who are paid twice monthly and want to pay some of the mortgage both cycles. but any time i personally was on that pay schedule i did rent/mortgage all in the start of the month and all other bills in the second half of the month.

i do pay a little extra but i do it by rounding up my one payment. honestly i just like round numbers. and yes it's easy and applies to the principal.
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AnEngineer
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Re: Double first mortgage payment?

Post by AnEngineer »

the_wiki wrote: Fri Mar 24, 2023 11:47 am With current rates, paying off your mortgage early is likely to be higher after-tax returns than investing, so any tricks that get you there are probably not bad advice.
I agree, but this doesn't do that. Instead as the extra payments accumulate you basically bank future payments, but the principle doesn't decrease ahead of schedule. This method does the paying early, but with the same number of dollars and the mortgage actually exists for the same amount of time, unless you tell your mortgage company to apply some of those payments to the principal at some point.

This is because when you send money to your mortgage lender they might as well stuff it in their pocket until it comes time that a payment was due and then they suddenly remember that you sent them something. The extra two half payments a year on biweekly instead of monthly sit in the pocket not doing you any good unless you take an extra step.

An alternative would be to have the mortgage due biweekly, which could have been set up, but is pretty rare as far as I know. I'm not sure why the loan advisor didn't suggest this, unless he works for the bank holding the mortgage.
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