Ask Dr. Don
By Don Taylor, Ph.D., CFA • Bankrate.com
Today, Dr. Don explains biweekly
mortgages and 403b contributions.
Biweekly mortgages
Dear Dr. Don,
My monthly mortgage payment is $600. I am 14 months in on a
15-year mortgage. Would making a payment of $300 every two weeks
reduce the length of the loan? If so, by how much? Please explain
how that might work.
Diane Deux
Dear Diane,
Biweekly mortgage payments aren't magic. You're just agreeing to
make one-half of your monthly mortgage payment every two weeks.
That results in 26 payments a year. You pay the equivalent of two
extra mortgage payments a year vs. your monthly mortgage.
Making a biweekly payment based on a semimonthly
amount is what gets those extra payments in your budget. Most lenders
require you to contract a separate service to arrange a biweekly
mortgage and there will be a service charge associated with that
payment option. A biweekly approach would reduce the life of your
mortgage by about 21 months.
My recommendation, if you are intent on prepaying
your mortgage, is to skip the biweekly approach and budget an extra
$100 each month on your monthly mortgage payment. In your case this
approach would reduce the term of the loan by about three years.
(I used Bankrate.com's mortgage
calculator with 166 monthly payments remaining on your original
loan to calculate the change in the loan term.)
Biweekly mortgages are most popular with people
who get paid every two weeks. As anyone that has ever been paid
that way can tell you, there are two months each year where you
get three paychecks. An alternative approach to budgeting is to
make the additional principal payments on your mortgage from those
paychecks.
For a quick check on whether you should be prepaying
your mortgage, look at the prepayment
calculator at SmartMoney.Com. After you input your
data, you'll have a better idea about whether it makes economic
sense to prepay your mortgage.
In addition, you should check out these stories
on mortgage-prepayment from the Bankrate.com mortgage news archive:
403b contributions
Dear Dr. Don,
My employer offers only one firm in which to contribute to a 403(b)
plan. I am able to contribute $10,000 a year and plan to continue
to do that if the return I am getting seems acceptable. For example,
in 1999 I contributed $21,394 (including a rollover from a previous
employer). My ending balance was $23,594. I like the tax deductibility
and deferment, but could I do better elsewhere.
Public Persona
Dear Public,
For our private-sector friends, a 403(b) plan is the public-sector
equivalent of a 401(k) plan. Except it's much harder to find a public
entity that provides matching investments as many private companies
do for their employees (something about taxpayers' money). Whether
it's a 401(k) or a 403(b) plan, many firms limit the employee's
investment options.
There are costs associated with plan administration,
and many small public entities will limit the plans offered to minimize
those costs. This is usually a good deal for the employee because
it means that the public entity is paying the administrative costs.
Once plan participants get past the initial
kick of actually starting a tax-deferred plan to invest for retirement,
they begin to focus, as you have, on how their investments are doing.
That's when the realization sets in that there are better performing
investments available, if only your organization would offer them
as plan options. Don't get caught in the trap of chasing last year's
or last quarter's hot fund. And don't let last year's results determine
if you should invest this year. With tax-deferred investing, putting
a dollar to work only costs you about 70 cents (depending on your
tax bracket). While it's true that the distributions will be taxed
at ordinary income rates, and those rates are higher than the capital
gains rate for most taxpayers, that doesn't mean that you are better
off taking the taxable equivalent ($7,000) and investing in a taxable
account.
Public entities should, at a minimum, offer
at least one family of mutual funds as an alternative to insurance-based
product, which is more commonly called annuities. Most 403(b) plan
participants don't need the insurance protection provided by annuities
and the cost of that protection is a drag on their return.
You may be able to influence what plan is offered
by your employer. See if other plan participants are dissatisfied
with the lack of choice and ask the decision makers what can be
done to expand the plan's options.
Bankrate.com writers base
their answers on our editorial content and advice of financial professionals.
We make no claims or representations about the accuracy, timeliness or completeness
of such content, advice or the answers provided to you. Our content, advice
and answers are intended only to assist you with your financial decisions. However,
by its nature such information is broad in scope. Your financial situation is
unique, and our content, advice and answers may not be appropriate for your
situation. Accordingly, we recommend that you get different opinions and seek
the advice of your accountant and other financial advisers before making any
final decisions or implementing any financial or investment strategy.
-- Posted: March 17, 2000
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