Unless they’re lucky enough to assume someone else’s mortgage, current buyers are paying interest rates near 8%.
The media will report on this in all kinds of ways, because people want information and they want workarounds. But sometimes, in this click-driven media world, what’s packaged as news is really a distraction.
Let’s take a look at one of the latest things reporters have jumped on. It’s a TikTok account that posted a “hack” by which home buyers could cut their high mortgage rates for items they’ve wanted — like new cars or vacations.
Don’t believe it.
So, What’s This Life-Changing “Viral Hack”?
The “viral TikTok hack,” from a self-described Zillennial Finance Expert, poses a simple suggestion: rather than make monthly mortgage payments, pay every two weeks. This splits your monthly total into two installments. And this way, you speed up your monthly payments to 28 days, instead of 30 or 31. So the mortgage balance shrinks a little faster.
OK, but can’t homeowners just send in an extra payment at any time of the year? Well, yes. But Fortune Magazine points out that “Some people may find it easier to manage their finances with biweekly payments, especially if they get paid on a biweekly basis.”
Hm. But if money’s so tight that the owner can only set aside mortgage money two weeks at a time, then where is the wisdom in looking for ways to “hack” a mortgage for a new car? People making their mortgage payments paycheck to paycheck likely don’t have cash set aside for important and sometimes surprising home upkeep and repair costs. A cash reserve is far more important than finding ways to get a new car or whatever a social media influencer thinks young homeowners want. And splashy purchases aren’t somehow made possible by paying a mortgage a few days faster here and there.
Does This Mean Suggesting an Early Payoff Is Bad Advice?
It’s not bad advice when someone suggests paying a mortgage off faster than it’s due. As long as the mortgage company allows early payments and doesn’t charge a penalty for making them, it’s all good. Some people buy homes and do have ample funds left over, and can start paying that debt back extra fast. Homeowners who are doing well now but not so sure what the future holds in store might want to get ahead of their mortgage payoff schedules.
Here’s a real hack. Some states offer higher homestead tax exemptions for early mortgage payers. And homestead status can shield home equity from future creditors. Maybe The Golden Years, With a Paid-Off Mortgage should go viral!
Fortune says the TikTok star told viewers to “call your lender and have them apply that extra payment to the principal balance, not the interest.”
Pssstt… That’s no secret. Buyers who pay extra principal can shave time off the life of the loan, so there’s less interest to pay on that principal. But most buyers have already heard this from their friends, mortgage brokers, or agents.
And to see that it’s done, a borrower can simply go to their mortgage servicer’s website, set up a user account, review the loan, and select “principal” or “interest” to pay, right from the payment webpage.
Note to borrowers who make payments by check: You can send in an extra amount and write APPLY TO PRINCIPAL on the Memo line. Check writers are submitting only a manual note (rather than filling out a standard form) about how they want to pay. So, its good to call the mortgage company and make sure everything you’re doing by check will work well on their end.
OK…But, Dear Fortune, How Is This News?
These days, when someone is called an “influencer” and spreads a “viral hack” on TikTok, is it news? At least this one tells us that (primarily young) social media audiences are getting a message. They can take control of their finances. And their real estate decisions play into that. Stimulating this kind of discussion will undoubtedly benefit some young people — even if only because they search for more information on the concept.
When they do their own looking, they’ll find that this supposed hack is something people have been doing for decades. People who had those double-digit mortgage rates of the 1980s were understandably keen to shave off some of that interest. Many did.
But today, most homeowners have mortgages that carry 5% interest rates and lower. What great rates to have! If you already own your home, you are probably in that very comfortable situation. And your modest mortgage rate is doing more for you, right now, than any hack. Because…
- You can leave that low-interest mortgage humming along for decades. Instead of paying off extra, you can get a CD at a bank or credit union that pays higher interest than your mortgage charges. Now that’s a real hack.
- Similarly, you can use your extra funds to buy U.S. savings bonds straight from the source and earn reliable interest. With the I Bond, your return is adjusted for inflation.
- And you’ve got something else going for you. Each year’s work of faithfully paying off your mortgage interest gets you a reward from the IRS. Ah, the old tax deduction hack! It’s just awesome in tax season.
Old Hacks, New Tricks… But No One Right Answer
The mortgage company itself might offer borrowers a biweekly payment option. Or — again, assuming there’s no penalty for early payments — do it yourself if you wish. For instance, plan to make one extra payment in the year. Dedicate it specifically to the loan principal.
Over time, paying down the loan faster cuts the amount of interest charged over the course of the loan. If you’re an excellent planner, you could allocate the sum of the saving to key commitments. Maybe you could redirect some money to your retirement funds. Maybe you could make home improvements. And so forth.
But paying twice a month isn’t necessary. Borrowers can increase their monthly automatic payments, or simply make an extra payment at any time if they’d like to hasten the payoff.
Far from a hack, the biweekly payoff method seems like extra work for you and the mortgage company. It might even turn out to be a hassle — with special fees as well as extra planning involved. Remember that influencer telling you to talk to a lender on the phone? That might just be perfect advice. Call a mortgage consultant — or a financial adviser— to get a professional take on whether paying a loan early makes sense for you, in your current financial circumstances.
Supporting References
Jersey Mortgage Company, via JerseyMortgage.com: Benefits of Bi-Weekly Mortgage Programs (Nov. 28, 2021).
Sydney Lake for Fortune Magazine, via Yahoo Finance: Influencers Want to Hack Your High Mortgage Rates for a New Car or an Extra Vacation. “This Can Be a Great Strategy,” Housing Market Expert Says—But Only If You Can Really Budget for It (Oct. 25, 2023).
And as linked.
More on topics: Assumable mortgages (pros), Assumable mortgages (cons), Unaffordable housing market
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