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Biweekly mortgage payments
Dear Money Matters,
I heard that paying your monthly mortgage in two installments
of 50 percent each month pays the mortgage much quicker than paying
100 percent once a month. Does this make sense?
Robie
Dear Robie,
You're close. I believe you're referring to a biweekly mortgage
payment program.
Its concept is rather simple. Rather than sending
your mortgage holder 12 monthly payments a year, you send them half
your monthly mortgage payment every two weeks.
Notice that it's every two weeks, not a half payment
every half month. A half payment every half month does little to
help you.
But paying biweekly takes care of your annual mortgage
obligation in only 48 weeks. From there, the remaining four weeks
of payments goes directly to the principal.
That's where your savings can really add up.
Using Bankrate.com's biweekly
mortgage payment calculator,
I worked up a $100,000, 30-year mortgage at 6.80 percent. With a
conventional mortgage, you pay $651.93 a month, and over the life
of the loan, you pay more than $134,000 in interest.
However, going with a biweekly mortgage payment plan
of $325.96 every two weeks cuts your overall interest costs down
to roughly $101,000. On top of that, you pay off your mortgage six
years sooner.
There are, however, caveats to bear in mind. First
is whether your current lender will let you convert to a biweekly
mortgage. Many lenders offer the program, while others do not.
The second concern is how complicated the changeover
from monthly to biweekly will be. In my case, all I needed to do
was notify my lender that I wanted to change over to a biweekly
plan. They sent me new vouchers, and that was the length and breadth
of it.
Some, however, require that you effectively refinance
your mortgage, which involves all the costs and fees associated
with re-tooling a loan. With others you need to attach instructions
with each check to ensure that each biweekly payment is applied
properly.
Another consideration is a proliferation of companies
that advertise that they'll set up a biweekly mortgage program for
you for a modest fee (usually a few hundred bucks). Those charges
can come as an upfront charge or may be amortized over a series
of payments.
Be careful about this. If you can set up a biweekly
payment program with your lender on your own, don't waste the money
having someone else do it for you. And, if going through a third
party is your only seeming option, make sure that you're going to
stay in your home long enough to recoup whatever costs were attached
to the biweekly changeover.
On the plus side, a third party setting up your biweekly
mortgage offers greater security that your biweekly loan will, in
fact, remain a biweekly loan. For example, if you set up a biweekly
yourself with your bank and it turns around and sells the loan to
someone else, the biweekly plan may not necessarily transfer to
the new mortgage holder.
Another issue is how often you get paid. If you're
in the armed forces or a teacher, there's a good chance you're only
paid once a month. That can make house payments every couple of
weeks tougher on you than someone who gets a check more frequently.
If the notion of a biweekly mortgage somehow seems
too rigid or you can't, or don't want to, hassle with setting one
up, there's still no reason you can't take advantage of prepaying
your mortgage. All that requires is tossing in a few extra dollars
when you write your monthly payment.
To be more specific, take your monthly mortgage amount,
divide it by 12 and tack on that amount every month. That effectively
adds an extra monthly payment every year -- the same objective achieved
by a formal biweekly payment plan.
For more details on biweekly mortgages, have a look
at our story "Do
you really want to pay your mortgage biweekly?"
-- Posted: June 3, 2002
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