Biweekly mortgage payments...can you afford not to do them?

[greedy4chips]

I misunderstood what I was posting the first time. Pearlieq set me straight...sorta. I already understood what bi-weekly payments will do for you, but thought this was meaning twice-monthly payments which is different than bi-weekly.

Bi-Weekly Mortgage Payment Plans
by Janet Wickell
Copied from here http://homebuying.about.com/cs/mortg...eekly_plan.htm

Accelerated Plans Reduce Interest and Help You Pay Off the Loan Faster
Do you want to pay less interest on your home loan? Of course you do, and it's not difficult. There are a few different methods you can use to reduce your total interest and pay off your mortgage at a faster rate.

Bi-Weekly Payment Plans

Your lender probably offers a bi-weekly mortgage payment plan, where you make a half-payment every two weeks instead of a full payment once each month.

By paying bi-weekly you'll make twenty-six half payments, or thirteen full payments each year--one more than you would make by sending the lender traditional monthly payments.

Every dollar of that extra payment goes towards reducing the principal balance of your loan, the balance that future interest calculations are based on. As you reduce the principal, you reduce the total interest paid and the length of time it takes to pay the loan.

Your lender won't accept half payments mailed to them twice each month, but they'll likely set up a plan to deduct the payment from your bank account every other week.

Many lenders charge a one-time fee to set up a bi-weekly payment plan.

Mortgage Examples
Let's look at a mortgage with a principal balance of $150,000, a term of 360 months, and an interest rate of 6%.

* Monthly principal and interest payment = $899.33
* Total Interest During Life of Loan = $173,757

Using a Bi-Weekly Option

* Bi-Weekly Payment = $449.67
* Total Interest During Life of Loan = $135,294
* The loan is paid off in 24 years instead of 30

Most of us won't live in a single house for thirty years, but don't let that stop you from paying bi-weekly, because shorter term savings are significant.

The first figure on each line below shows the loan's principal balance at the end of that year's monthly payments. The second figure shows how much principal remains at that same time for someone making bi-weekly payments.

Year 1
$148,157 vs. $147,198 (Difference of $959)

Year 2
$146,202 vs. $144,224 (Difference of $1978)

Year 3
$144,126 vs. $141,066 (Difference of $3060)

Year 4
$141,922 vs. $137,715 (Difference of $4207)

Year 5
$139,581 vs. $134,157 (Difference of $5424)

Year 6
$137,097 vs. $130,380 (Difference of $6717)

Year 7
$134,459 vs. $126,371 (Savings of $8088 to date)

[pearlieq]

There are a couple of reasons why folks may choose not to:

1.) Paid semi-monthly. They could still arrange it, but it's quite a hassle. It's easier to just make extra equity payments on another schedule.

2.) No rush to pay off mortgage. With a low interest mortgage I have many, many other options to make a better return on my money, especially once my tax deduction is figured in. My money works harder for me paying down student loan debt, invested for retirement, or even invested in a taxable account.

I can understand why people like to pay their mortgages down early, and if we have kids I'd probably work to get it paid down before they leave for college, just for cash flow purposes, but there are some legitimate reasons not to accelerate payment on many mortgages.

[greedy4chips]

Originally Posted by pearlieq

1.) Paid semi-monthly. They could still arrange it, but it's quite a hassle. It's easier to just make extra equity payments on another schedule.

If owners are properly budgeting and not living paycheck to paycheck this is only an excuse as to why not to do it.

Originally Posted by pearlieq

2.) No rush to pay off mortgage. With a low interest mortgage I have many, many other options to make a better return on my money, especially once my tax deduction is figured in. My money works harder for me paying down student loan debt, invested for retirement, or even invested in a taxable account.

This method does not ask for you to increase the amt paid per month only to make 2 payments that are each equal to 1/2 the monthly payment amount.

Originally Posted by pearlieq

I can understand why people like to pay their mortgages down early, and if we have kids I'd probably work to get it paid down before they leave for college, just for cash flow purposes, but there are some legitimate reasons not to accelerate payment on many mortgages.

There are many reasons some choose to pay off mortgages early, whether it makes sense or not is another discussion.

This strategy requires the mortgage payer to pay the same monthly payment except in 2 payments on say the 1st and 15th versus one payment on the 15th of the month. By making that 1/2 payment 2 weeks early you are saving the 2 weeks of interest on that principle amount.

As my original post showed the potential to save $8000+ interest in 7 years on a typical $150,000 mortgage. Overall you cut 6 years off your mortgage and $34,000+ in interest payments.

[JanH]

I checked into this and I think that our bank charges something over three hundred dollars for the change to the plan. I didn't have the money at the time, so I haven't done it. Makes sense, but I think I could also add money to each payment on the principal and make up that principal amount in the extra payment. Either way, it would help pay it off quicker.

[pearlieq]

Originally Posted by greedy4chips

If owners are properly budgeting and not living paycheck to paycheck this is only an excuse as to why not to do it.

Tomato, tomahto. It would be a royal pain to set up paying a mortgage bi-weekly when you are paid semi monthly. It has nothing to do with budgeting or living paycheck to paycheck. As long as you don't have a pre-payment penalty on your mortgage you can make extra equity payments at any time. Bi-weekly isn't the only way to do it.

Originally Posted by greedy4chips

This method does not ask for you to increase the amt paid per month only to make 2 payments that are each equal to 1/2 the monthly payment amount.

No, that is not what this method is having you do. This method has you pay 1/2 of your mortgage payment every two weeks. There are 26 two week periods in a year, thus you are making 13 payments per year, one extra payment than you would by paying monthly.

That extra payment is where the bulk of the money savings come from.

Just paying your mortgage in 2 installments per month will save a bit in interest money, but it's not the same as what's illustrated in your OP.

[Ima saver]

I have a mortgage payment on some land I bought. I pay my payment in person at the bank each month. EAch month, I give them a seperate check for payment on the principal also. After 21 payments, I have reduced my balance from $64,000 to $24,000! I also pay much less in interest than I did at the beginning!

[safari]

I agree with pearlieq. A lot of people misunderstand what bi-weekly plan really means. It's not the same as making 2 payments per month instead of one. There are 52 weeks in a year, so if you make a payment once every two weeks that means that you'll be making 26 half payments a year, as opposed to 24 half payments a year, if you're paying twice a month. This means that every year you'll be making one extra full payment. If someone wants to pay more money toward the principal, then why not pay a little extra every month. It makes no sense to pay the bank fee to setup a bi-weekly plan if you can do it yourself. For example, if your mortgage payment is $1,200 a month and you want to make one extra payment a year, all you have to do is add $100 to your monthly payment ($1,200/12=$100), so your new payment will be $1,300. You can schedule it in your online billpay like you do now and you won't have to pay any fee to the bank whatsoever!

[scrava]

Plus, I tried to pay my mortgage 2x a month and when I sent the 1st check, for 1/2 my mortgage, they called me and said they didn't know how to apply it. when I explained that I read about saving interest by paying every 2 weeks, they toldme I could do it on my own, I had to join their plan.

[Ima saver]

They get real confused if you send them 2 checks. I agree with just paying extra every month!

[mbhunter]

Originally Posted by safari

... For example, if your mortgage payment is $1,200 a month and you want to make one extra payment a year, all you have to do is add $100 to your monthly payment ($1,200/12=$100), so your new payment will be $1,300. You can schedule it in your online billpay like you do now and you won't have to pay any fee to the bank whatsoever!

This tactic will get you really close to your bi-weekly schedule. There's a negligible difference in the payoff time doing it this way and doing it the bi-weekly way. Plus, it's a lot easier.

By the way, some companies will charge you an arm and a leg to do this for you. I've gotten a couple of offers in the mail and the "service fees" are hundreds of dollars, and non-refundable after six months.

[greedy4chips]

My apologies pearlieq! I was thinking twice-monthly and not bi-weekly payments when I made this post. Silly me.

You are right when you state that it results in 13 payments per year when done bi-weekly versus 12 monthly payments.

You can see in my 1st response to you that I was thinking twice monthly payments.

Do I feel stupid now, because I already understood the bi-weekly payment idea.

[pearlieq]

Originally Posted by greedy4chips

My apologies pearlieq! I was thinking twice-monthly and not bi-weekly payments when I made this post.

No apology necessary! DH and I once spent an entire evening playing "Who's on First" about this very topic! It can cause brain cramps.

I am kind of curious now. If one's mortgage company were cooperative, I wonder how much you could save by paying twice a month. Even if it only knocked a few months off of the life of the loan, it would be worth it. I'll have to look into this.

[greedy4chips]

Originally Posted by pearlieq

I am kind of curious now. If one's mortgage company were cooperative, I wonder how much you could save by paying twice a month. Even if it only knocked a few months off of the life of the loan, it would be worth it. I'll have to look into this.

I did sorta. Your (normal) mortgage interest is calculated on the 1st of the month and it does not matter when your payment actually is received by them as to the interest charged on the loan.

However, you can get a simple interest mortgage where the date the bank receives your payment does matter and will save you interest if paid before the due date.

Here is an article that explains it all...way better than I could and more likely to be correct than me. Hehe

http://loan.yahoo.com/m/q_sim.html

[MonkeyMama]

This is a trap that a lot of my other financially savvy friends have fallen for. I know a lot of them who have signed up for this, understanding it fully. But the mortgage company charges large fees for this. I thought most of them charge a fee with every transaction, not to mention set-up fees... What they didn't know is they could have set that mony aside and make an extra payment at the end of the year, no extra charge. OR divide their payment by 12 and send in that amount every month, which adds up to 1 extra payment per year. It's all the same in the end but avoids extra fees.

I find it far simpler to pay a little extra every month.

[smooper]

I also just pay extra each month. I requested "Principle Only" payment forms, but do not use them since anything above the mortgage payment goes towards principle reduction with my Wachovia loan. Its just easier for me to send extra each month. The payment is $813, I send $1005. I also have the option to have the payment automatically taken out of my account, but I send in my payment ticket each month ( Yes, I could save 37 cents each month) just so I can physically see and feel how many payment slips are left AFTER our mortgage is paid off! A bit strange, but that book is 60 slips thick and I'm easily amused.

I havn't been keeping real good track, but We should be at about 31 more payments left. We just hope we make it till the end because this would be a MAJOR accomplishment and leave us with NO debt!

[cschin4]

It is very simple to just "add to principal" 1/12th of a payment with each monthly payment. I personally have enough bills and the last thing I would want is to pay the mortgage 2x a month. It is just another way for some financial person to charge a fee when you can already accomplish the same thing on your own for free.

[Ima saver]

A good book to read about paying off mortgages early is "Banker's secret" by Marc Eisenson.

[creditcardfree]

I heard from someone in the mortgage business, that even paying your mortgage 15 days early per month changes the amortization of the loan...obviously it will pay off slightly quicker. I'm not sure how much quicker...

Any thoughts on that?

[shelbylovesmelby]

Originally Posted by creditcardfree

I heard from someone in the mortgage business, that even paying your mortgage 15 days early per month changes the amortization of the loan...obviously it will pay off slightly quicker. I'm not sure how much quicker...

Any thoughts on that?

Paying anything early will save you on interest & shorten up on the duration of the loan. Most loans have a daily interest accumulating. So if you pay a few days earlier you knock down the daily interest rate. It may only be by just a lil change but a few pennies over 30 years can really add up & shorten that loan by a few years.

[greedy4chips]

Originally Posted by creditcardfree

I heard from someone in the mortgage business, that even paying your mortgage 15 days early per month changes the amortization of the loan...obviously it will pay off slightly quicker. I'm not sure how much quicker...

Any thoughts on that?

Only if it is a simple interest mortgage, otherwise the date you pay does not matter (as long as it isn't late).