Is A Bi-Weekly Mortgage Good For Me?
Question: My lender has sent a letter offering to create a bi-weekly mortgage program. They would take payments directly from my checking account and as a result my loan would have $24,000 in additional equity after 10 years. If I hold onto the loan until it’s paid off I would save $70,000. This sounds pretty good. Is it?
Answer: With a bi-weekly mortgage programs you essentially make a half payment every two weeks. Let’s say you now pay
$1,500 a month for principal and interest. With a bi-weekly loan program you would pay $750 a month.
Here’s the math: $1,500 x 12 monthly payments a year equals $18,000 while 26 bi-weekly payments x $750 equals $19,500. The difference? A total of $1,500 — or one monthly payment.
In other words, the “secret– of a bi-weekly mortgage is not that payments are made every two weeks or that payments are collected electronically. Instead, the trick is simply that more money is paid to the lender each year and the loan balance is therefore reduced at a faster pace. Interest costs fall merely because there is less outstanding principal.
Are you now allowed to prepay your loan in whole or in part without a prepayment penalty? These days most loan payment coupons have a line which allows you to make an extra principal payment each month. With such an option you can effectively create your own prepayment plan without cost or lender access to your checking account. For specifics, check with your lender.
Be aware that your program is directly with your lender and requires no up-front fee, no additional fee per payment and no one else touching your money. A bi-weekly program with a third-party — someone who is NOT your lender — cannot be recommended.
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Syndicated originally by Content That Works and posted with permission.
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