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LESSON 27: PREPAYMENTS
(continued from previous page)
2) Set
up a formal biweekly prepayment plan.
These plans work by requiring you to pay half of your monthly mortgage
payment every two weeks. This results in 13 monthly payments being
made a year, rather than 12. Unfortunately, most biweekly
prepayment plans carry an initial setup fee of a few hundred
dollars, plus a processing fee of a couple bucks for each payment.
Borrowers can do the same thing (split their payments) themselves
for free, though some are willing to pay the fees just to avoid
the hassle of going it alone. See
Tip 2
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Good
budgeting tool for people paid biweekly |
 |
You pay
a fee and there's less flexibility if an unforeseen financial
problem arises. |
 On
a 30-year fixed mortgage of $100,000 at 7 percent interest,
instead of 12 monthly payments of $665, or $7,980 a year, you
would make 26 biweekly payments of $332.50, or $8,654 annually.
The total interest would be reduced $34,463 and the loan term
would be shortened to about 24 years. |
 Calculate
the impact of extra payments on your mortgage
Tip
1: Keep track of those extra
payments to make sure that they are being credited against
your loan balance.
Tip
2: Be sure to consider the
tax implications of prepayment. Prepaying reduces mortgage
interest, which is tax deductible. That may not be beneficial
in your tax
bracket. It also might be more profitable to put that
extra cash in an investment account.
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