Bi-Weekly Mortgage Savings VS. Increased Interest Deduction Savings

[notactiveanymore]

My friend is about to buy a house and her mortgage broker is trying to dissuade her from doing bi-weekly payments because he says that she'll save more with the increased mortgage interest deduction. My strong inclination is that over the mortgage life, you'll save way more by doing bi-weekly payments than the increase in marginal tax savings, but I haven't modeled it yet.

Does anyone know of an existing model out there for this? I'll make my own if necessary, but no sense re-inventing the wheel, yeah?!

I'm mostly looking for hard numbers now out of curiosity because we've already talked through the behavioral and practical benefits. Namely: 1) she is buying the house with her long-term boyfriend and splitting a mortgage interest deduction is harder than just splitting payments, 2) savings from the slightly lower taxes-owed will likely disappear through spending versus a forced savings in home equity, 3) if she did enough things to bring down her agi, then the benefit of the increased deduction will decrease as well.

Anyway, I told her that the real math answer is probably that she'd be best off if she did neither and instead put more money in her 401k or paid more on her 7+% private student loans or 6.8% public student loans. But regardless, I'd still like to know the real answer between the two actually given options.

Thanks in advance!

[slugline]

I don't have a spreadsheet model to prove it but I think you're spot on with your reasoning. The mortgage interest deduction can be thought of like a discount off the mortgage interest, which by definition cannot be less than the original mortgage interest itself. As you suggested, the real payoff from not paying down the mortgage early is not from the deduction itself, but using the opportunity to redirect money towards investments with higher expected returns.

[frugaliknowit]

The answer to your question is that it is ALWAYS better to pay less interest, even if that interest is somewhat offset by a write off.  It does not need to be quantified to be answered.  $100,000 X 04= $4,000 per year before tax/after tax might be $3,000 per year...

Analagous to:  Milk is subsidized by the government.  My family needs 1 gallon per week.  If I buy 1 gallon per week, will I be paying more taxes/receiving less subsidy than if I buy 1.25 gallons per week?  You only need 1 gallon per week, so only buy one gallon!

Caveat:  Make sure your friend does not pay fees to set up a bi-weekly mortgage payment.  This is not necessary.  Google the subject...you can just make extra principle payments to have the same effect.

The primary advantage of biweekly payments is that for folks who are paid twice per month, it keeps more of their cash working toward reducing debt instead of being spent or sitting in near zero interest checking/savings accounts prior to the due date of the mortgage payment.  In my opinion, it does not prevent investing at higher returns, except to the tune of one payment per year.

[Proud Foot]

Making bi-weekly mortgage payments could actually give you an increased interest deduction in the first couple years.  The difference wouldn't be much and would be dependent on when your monthly payment would occur.  This would be dependent upon the day the monthly payment falls on. After the first couple years your monthly payment would result in interest.  When just looking at the mortgage you will always save more by paying off earlier vs taking a higher interest deduction.