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How Much Does 13 Payments Per Year Save Me?

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THE SCENARIO As I covered last time, making a 13th payment per year on your mortgage pays it off faster. And while it's intuitive that paying off a loan faster will save you money in interest, we didn't cover how much I'd actually save with the 13-payments-per-year plan. So let's do that now. This concept was pretty popular in the late 70s and early 80s, when mortgage interest rates were much higher than they are right now. So this time I'll use a mortgage that might have originated in that era. Like last time, I'm going to spread out the 13th payment over the 12 months of the year, and like last time I'm going to call this the 'enhanced' payment. The question: If I have a 30-year fully amortizing mortgage for $175,000 at 11.25%, and if I were to make the enhanced payment every month, how much interest would I save versus making my normal payment every month?

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THE SOLUTION This problem has 6 steps, but most of them are pretty simple:

1. Figure out my normal payment.
2. Figure out what my enhanced payment would be.
3. Figure out how long it will take me to pay off the loan with the enhanced payment.
4. Figure out how much I'd pay overall if I made normal payments.
5. Figure out how much I'd pay overall if I made enhanced payments.
6. Figure out how much I'd save overall if I made the enhanced payments instead of the normal ones.

First things first, make sure the calculator is using 12 Payments per Year. Step 1: Figuring out my normal payment N: 360 (It's a 30-year loan) I/YR: 11.25 (The interest rate on the loan is 11.25%) PV: 175,000 (I borrowed $175,000) PMT: (This is what I'm trying to find) FV: 0 (The loan amortizes fully)

My normal monthly payment is $1,699.71.

Step 2: Figuring out what my enhanced payment will be Every month, I want to pay an extra 1/12 of my normal payment. $1,699.71 ÷ 12 = $141.64. So my enhanced payment is $1,699.71 + $141.64 = $1,841.35 Step 3: Figuring out how long it will take to pay off with the enhanced payment N: (This is what I'm trying to find) I/YR: 11.25 (The interest rate on the loan is 11.25%) PV: 175,000 (I borrowed $175,000) PMT: -1,841.35 (My enhanced payment is $1,841.35) FV: 0 (I want to know how long it'll take to fully pay off the loan)

Using the enhanced payment, the loan will be paid off after 237.51 months (19.79 years).

Step 4: Figuring out how much I pay overall with my normal payments If I make normal payments, then I pay 360 payments of $1,699.71, meaning that I pay 360 x $1,699.71 = $611,894.67 overall. Recalling that I only borrowed $175,000, my sum-total payment of over $600,000 seems pretty high, and I can understand why any attempt to lower that to a more reasonable figure would be attractive. Step 5: Figuring out how much I pay overall with enhanced payments If I make enhanced payments, then I pay 237.51 payments of $1,841.35, meaning that I pay 237.51 x $1,841.35 = $437,346.11 overall I still only borrowed $175,000, but paying $437,000 is much better than paying $611,000 to be sure. Step 6: Figuring out how much I save with enhanced payments If I make enhanced payments, I pay $437,346.11, versus the $611,894.67 total from normal payments.

So making enhanced payments saves me $611,894.67 - $437,346.11 = $174,548.56. That's nearly the amount I borrowed in the first place!

Conclusion Did you notice that this time, making the enhanced payment lopped more than 10 years off the total loan term? And that last time it was less than 5 years? Paying down loans quickly can save a lot of time and money, particularly when the interest rate on the loan is high!

What do you think? If interest rates were to once again reach the levels they did 35-40 years ago, would you find the 13-payments-per-year plan to be more attractive than you do today? Or do you like the concept, even on your 4% and 5% loans? Why or why not? Let us know in the comments!