Many current home owners as well as new home buyers ask about the bi-weekly mortgage. They have heard that the borrower can save thousands of dollars in unpaid interest while paying the mortgage off early. The plan requires that one-half of the mortgage payment be made every two weeks. this results in making 26 one-half payments or one full extra payment every year.
Most borrowers know that they can save money by paying even small extra amounts to reduce the principal balance quicker. Most lenders now offer the bi-weekly plan. Additionally, home owners often receive notices from companies who will arrange such a payment plan. BE CAREFUL! In most cases, the lender and/or the company will charge $350 to $750 as a one time fee to initiate the service. Plus, there is usually a monthly charge for maintaining the service. The process involves simply collecting the bi-weekly payments via an automatic deduction process from your checking account and then making the “one extra payment” for the borrower at the end of each year. With a bit of self discipline, a home owner can do it themselves.
One way to do it . . . deposit one twelfth of the monthly payment into a savings account each month. In November, write a separate check for the “one extra payment” amount and send to the lender with a note indicating that the payment is for “principal paydown only”. This will enable a borrower to identify within sixty days (when the lender provides their year end statement regarding loan balance, interest paid, etc.) that the lender has credited the account accurately. Some feel that this “one payment” method is better than a small additional monthly payment made to principal paydown.
HERE ARE A FEW USUAL QUESTIONS
1. WILL IT WORK ON ANY LOAN? Absolutely! FHA, VA, USDA and Conventional loans, both fixed and adjustable rate mortgages, 30 or 15 year terms. One can save money regardless of the type of current loan.
2. WHEN CAN ONE START? The sooner the better! Whether one has a brand new loan or has been making payments for months or years, money can be saved in the form of unpaid interest. It works for both new and existing loans.
3. HOW LONG DOES ONE HAVE TO PARTICIPATE TO MAKE IT WORTHWHILE? Money is saved the very first payment, but the longer one participates, the greater the savings in unpaid interest and the shorter the payoff term. It is advised that one retain their own record of extra payments and an analysis of the benefit via year by year savings.
Here’s an example of the possible savings on a $100,000 loan at 8% interest:
Mortgage Paid Off: 30 years 21 years
Total Interest Paid: $164,155
Interest paid via bi-weekly basis: $106,748
Total Interest Saved: $ 57,407
4. IF I DON’T PLAN TO STAY IN THE HOME FOR 20 YEARS, IS IT STILL A GOOD THING TO DO? It might be! An analysis of the current loan situation can identify the possible savings over the next several years and assist in your decision making. Generally, it is a good plan for practically everyone . . . simply because it initiates a habit that saves money immediately and also a habit that hopefully would continue with any new mortgages acquired.
5. SHOULD THE PLAN ONLY BE USED WITH A PERSONAL RESIDENCE? The same kind of savings will occur with any mortgage, including mortgages on rental or commercial properties. It is best to analyze each mortgage separately to determine the savings that could occur. This plan could be particularly good for persons hoping to retain and use rental property for future income purposes by paying off the mortgage early.