When it comes to eliminating debt and managing cash flow, the Power Payment principle works whether you are paying one extra payment per year or following a comprehensive cash flow management program. Although the results will vary, the principle remains the same: The more money that is paid directly to principal, the more powerful is the effect of lowering the total amount of interest you’ll pay.
A few common examples of mortgage power payments are biweekly and bimonthly payments. Of the two, the benefits of biweekly payments far exceed the benefits of bimonthly or semimonthly payments. With biweekly payments, you pay half of the monthly mortgage payment every 2 weeks and with bimonthly payments you pay half of the monthly payment twice per month (on the 1st and 15th for example) rather than the full balance once a month. A biweekly payment is comparable to 13 monthly payments a year, which will result in accelerated payoff of your mortgage and lower overall interest costs. For example, the biweekly mortgage payment program can pay off a $200,000 30-year fixed loan at 7% interest in approximately 24 years, which is 75 months sooner than a standard payment plan, resulting in an interest savings of $68,925.
To set up a true biweekly or simple interest biweekly payment schedule, you must
• Have a lender that will immediately credit each 1/2 monthly payment upon receipt.
• The lender must calculate interest for two-week intervals and apply the biweekly payments, less the interest, to reduce the total principal owed every two weeks.
There are several different methods for determining the most effective application of power payments, although the principle remains unchanged. It is essential to reduce the total principal owed in order to decrease the total interest to be paid and accelerate the reduction of debt. The first step is to identify where you will find the necessary cash resources to be used for power payments, which often requires significant planning and will undoubtedly require considerable sacrifice. One of the first places to start is in the creation of a family budget to help identify how much money you have and where it is going. Reviewing your spending habits will help you re-prioritize your spending and show you how to create a tremendous amount of extra cash resources.
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