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Can Bi-Weekly Loans Stop Mortgage Foreclosures?

If you have a bi-weekly mortgage will your payments be more in line with your paycheck, thus lowering your costs and reducing the chance for foreclosure?

Imagine that a household has two wage-earners who take in $100,000 per year. Lenders allow them to finance with monthly payments equal to 31 percent of their income or $2,583 per month. If $100 per month goes to property insurance and $400 a month goes for property taxes, that leaves $2,083 per month for mortgage interest and principal payments. At 5 percent interest that’s enough to borrow $388,025.

Okay, now go back to that household income. If the household income is paid out with a check on the 15th and the 30th of each month then each check is worth $4,166 — before taxes, social security and Medicare. Subtract those costs and you’re looking at roughly $3,500 twice a month.

That sounds like a lot of money, at least until you mention auto insurance, car payments, credit card debt, student loans, state income taxes in most jurisdictions, health insurance and other costs. Suddenly the monthly mortgage bill looms large.

But what if interest and principal payments could be reduced to $1,041.50 every two weeks? Not only that, the loan will be paid off several years earlier, saving more than $63,000 in lifetime interest costs. Would you be ahead?

The Bi-Weekly Diversion

With monthly payments for principal and interest we’re paying $2,083 per month for the standard 30-year mortgage. That sum, times 12 monthly payments, equals $24,996 per year.

With the bi-weekly we shell out $1041.50 per payment. A payment every two weeks means there are 26 payments per year or a total of $27,079 annually.

The reason a bi-weekly mortgage results in a shorter loan term is not because of magic, it’s because you’re paying more to reduce the loan balance each year. The result is a shorter loan term, around 25 years rather than 30. Most of the interest savings come from not having to make mortgage payments for the last five years of the mortgage.

Bi-Weekly Marketing

We all routinely receive third-party bi-weekly mortgage offers, third-party meaning not from our lenders. Such third-party companies want to set up a bi-weekly loans for us, usually for a start-up fee and a charge with each payment. And they’re willing to do this without the need for a credit report or loan application.

So what’s the problem?

  1. A mortgage is a contract between a borrower and a lender.
  2. The third party bi-weekly company is not your lender.
  3. Because the third-party bi-weekly company is not a lender it does not need your credit report or a loan application. It has nothing at risk, no money has been advanced to you.
  4. While the third-party bi-weekly company collects your money, your lender is not obligated to accept payments every two weeks.
  5. In other words, the bi-weekly company collects your money and simply makes 12 larger payments.
  6. The money given to a third-party bi-weekly mortgage company is money that could have gone to reduce your mortgage or other debts.
  7. If you’re paid on the 15th and 30th of the month you receive 24 paychecks a year — not 26. This means your paycheck schedule differs from a bi-weekly payment plan.

But wait, isn’t the third-party company audited? Maybe, but so what. Even if a third-party company is audited the point remains that you have to make required payments to your lender every month.


How about insurance for the third-party company? Insurance to cover what? How much coverage is available? Who is the beneficiary? How long will it take to collect? And, again, so what? Your agreement to repay the loan is with your lender and no one else.

Of course, no one mentions what happens if your third-party bi-weekly helper makes your payment late — or worse, doesn’t make the payment at all. It’s your credit that will be impacted, you who will have to quickly come up with any unpaid balance and you who will face foreclosure if you don’t have the money.

Lastly, are you ahead prepaying your mortgage or is the money better spent reducing credit card balances and other debt?

The Right Way To Get Bi-Weekly Benefits

If bi-weekly mortgage payments make sense from a math and personal finance perspective why not take advantage of the concept in a way that costs nothing extra?

First, see if your loan allows prepayments in whole or in part without penalty. Most payment forms allow you to add extra principal with each payment and that’s what you need.

Second, take your current mortgage payment — the amount you pay for principal and interest — and add 8.5 percent. Make the larger payment each month. Example: If you owe $1,000 for principal and interest add $85 for additional principal. Remember that you must also pay taxes, insurance and other required costs.

Third, check your mortgage balance each month to assure the additional payment is being properly recorded.

Notice that if you do it yourself you do not have pay any additional fees or charges. No one else is touching your money but you. No more than 12 payments are being made each year so your lender is happy.

Foreclosure

You can still default and be foreclosed if you prepay your mortgage. You must make your required payment, on time and in full, each month and without exception until the debt is completely repaid. That you have made voluntary prepayments does not change your contractual obligation with the lender.

Calculators

Good bi-weekly mortgage calculators which do not require your name or other information are provided by MortgageCalc.com and BankRate.com.

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Posted in: Mortgages

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