Don't Believe This Ridiculous Mortgage Tip

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Taking steps to pay off a mortgage faster can lead to lower interest costs over the life of your mortgage. But it's important to pay attention to the details since not only do mortgages vary from each lender but also from other types of debt, including credit cards.

With this in mind, Motley Fool analysts, Kristine Hartjes and Nathan Hamilton, discuss in the video below one mortgage tip that some get wrong. Taking one credit card strategy to pay down debt faster and applying it to a mortgage won't have the same effect.

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KRISTINE HARJES:

So there's a ton of information out there on the internet about getting mortgages. People have tips left and right, and sometimes it's kind of hard to tell what you should and shouldn't believe. One tip that I've seen, that I think is absolutely ridiculous, is that if you make biweekly payments, you'll end up paying less.

NATHAN HAMILTON:

Yes, and it's important to consider in which scenarios you will pay less, where it does make sense, and where it doesn't make sense. The strategy and the thinking is pay biweekly so that you're getting in a routine of paying your balances down quicker each month. Now that comes from a credit card strategy which does have a positive impact. The saying is pay your credit cards, maybe every few days, to get the average daily balance lower throughout the month.

With a credit card, your interest that you are charged is calculated based on an average daily rate, and if you are paying down that balance throughout the month, your average daily balance is going to be lower.

That's not the case with mortgages, and this is where people mess up and may get it wrong. When you pay early on your monthly mortgage payment, it's actually held until the due date and then applied to the principal. Your average daily balance is the same throughout the month regardless.

The caveat to this altogether is you can pay less interest over the life of a loan by paying biweekly, and here's how it works out. If you pay biweekly, the calculation here is 26 payments throughout the year, and that's one extra monthly payment altogether, so it's kind of a financial hack to get it together.

KRISTINE HARJES:

It's so simple, but it's so smart.

NATHAN HAMILTON:

Yeah, it works.

KRISTINE HARJES:

You have 52 weeks in a year, so you divide that up and that's 26 biweekly payments...

NATHAN HAMILTON:

Yup.

KRISTINE HARJES:

But if you were only doing it once a month and paying twice as much, then you would only be doing it 12 times, but instead you get to squeeze in that one extra monthly amount.

NATHAN HAMILTON:

Trick your brain. It's just understanding the difference between the two, because some misinformation online says you're going to reduce your average principal throughout the month on your mortgage. It doesn't work that way. That's not how mortgages work.

KRISTINE HARJES:

Right. Your monthly cost will be the same.

NATHAN HAMILTON:

Yes. So over the long term, if you are making 26 biweekly payments, 13 monthly payments per year. Sure, your interest is going to be lower, but you're not going to get there the same way that some people would advertise online.

KRISTINE HARJES:

Exactly. It's very different than the credit card tip. Thanks for helping me clear that up.

NATHAN HAMILTON:

Yup.

KRISTINE HARJES:

So people listening, you can always go to Fool.com/Mortgages for more tips like these, and clearing up facts versus fiction. You can also compare rates and get in contact with certified lenders, and you can even download our free mortgage guides, such as "5 Tips to Increase Your Credit Score Over 800."

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