biweekly mortgage payment
This may be a dumb quesiton–chalk it up to being green (first-time home buyer). Anyway, I received a letter from my bank saying that I would save tons of interest and shave years off of my loan simply by paying my mortgage biweekly. Is this right? How can getting half of a payment every two…
This may be a dumb quesiton–chalk it up to being green (first-time home buyer). Anyway, I received a letter from my bank saying that I would save tons of interest and shave years off of my loan simply by paying my mortgage biweekly. Is this right? How can getting half of a payment every two weeks instead of a full payment every month be worth that much? I had intended to pay once a month and add 1/12 of a mortgage payment. Should I be paying twice a month and adding 1/24?
The only thing I would add, is that I think you have to be a month ahead and THEN pay the bi-weekly amounts. You cannot start off paying bi-weekly, unless you are set up through the bank itself who did your mortgage. (The fee kind I believe)
You can do this without paying the fee, by doing it the way I mentioned. You are choosing yourself to pay bi-weekly and could change if you needed to, versus being required to.
For Example..easiest if you have a new loan..
Today is March 13. Your first loan payment is Due April 1st.
If you get paid bi-weekly and have the money to pay an extra payment before starting your loan..
Pay today the Full April Payment :: Let’s say it’s 2000.00.
On your next payday: let’s say March 15th. Pay half. 1000.00
Next payday March 30th. Pay the other half. 1000.00
You have now paid your April Payment early, and have started the bi-weekly.
This way the bank SHOULD be applying your half payments when made because you are considered Current on your loan.
IF you paid 1/2 on March 15, and 1/2 on March 30th and it was the APRIL Payment…
I don’t believe the first 1/2 payment will be applied UNTIL you pay the 2nd Half of the payment on the 30th.
I THINK it only works if you are already paid first.
I hope that makes sense.
OF COURSE , PLEASE check with your Own Mortgage company to verify first.
Do like you said in your original post – pay an additional 1/12 every month & make sure it goes toward principal reduction. Essentially the same accelerated payoff, but you avoid paying the bank a few hundred bucks to set up the biweekly plan for you. You can always stop the extra principle payments if you have to, or if there’s something better to do with that money.
http://www.bankrate.com/brm/news/mtg/20010920a.asp
We’ve been paying off our mortgage fairly aggressively over the last couple of years, mainly out of skittishness about the equity markets, and low yields in the fixed income markets. Prepaying your mortgage is just like any other investment, it should be weighed against the alternatives.
So while our mortgage prepayments only yielded 4-5% after the tax impact is considered, that’s a lot better than the 30-40% loss those funds would have taken if invested in equities over the same time period. We’ve saved significantly in the short term and long term by taking the guaranteed return on retiring our debt.
I also want to emphatically agree with those who’ve said that while prepaying your mortgage can be a good idea, no way in hell should you ever pay your bank a fee for the privilege of paying early or more frequently. About the only people I could imagine a bank sponsored biweekly payment plan would make sense for are those so undisciplined that they’ll blow the money if they take responsibility for managing the prepayments. With most loans, you can add extra principal to your payment on any schedule you wish, which gives you the most flexibility.
Other than your grandparents, who do you know that has stayed in the same house for 30 years? So the benefit may only be over 10 years or less. Besides, up front you usually have to make an extra payment. Sure there is a savings over the long haul, but napkins aside, you’ll only save significantly if you plan to live and die in the same house.
Sorry just got back to the office. I think everyone already covered anything that I would have added. You need to check with your existing lender to see if they allow it and if there are any fees with it. Even if there are you may still come out ahead but you would need to do the math. Most loans do not have pre-payments in NY so you can do it yourself but check with your lender first to see if they are attributing it to the principal or just pushing back your next payment. Your payment will not go down but you will be shortening the life of your loan.
I prefer the 30yr fixed mortgage if you are young and just starting out in life but I sometimes recommend the 15 yr fixed for individuals that have significant equity in their property can afford the payments and are hovering around the age of 50 or so. That way they can time their loan payoff for retirement.
adahill@approvedfunding.com
Get yourself a mortgage calculator. THey’re all over online, and you can do what-if scenarios all day long.
I use Mortgage Advisor
http://www.mortgage-software.net/
But I’ve had that a while, there are probably plenty of free ones out there. Check tucows.com or similar.
Your payments will not go down if you reduce your principal through these methods. If you have any questions about the stability of your income sources or the amount of money you have set aside in a rainy day fund (at least 8 mths of expenses), don’t make extra payments. Instead put it in a rainy day fund. You’ll have the peace of mind that you can get through the next year of two. You can always start making extra principal payments once the crisis is over.
yeah, townhouse lady, that why I said the 30-yr gives you more flexibility … if your financial picture changes. but sometimes, the gap in interest rates can make it pretty attractive
CAVEAT EMPTOR
This is a money making opportunity for your bank. You are able to make additional principal payments on your own in most cases.
You should also check to see if the payment is applied to your account on a biweekly basis or if they are applied on the original due date. Those that apply the payment on the due date are collecting a fee plus they are receiving a float on the use of your funds.
For those of you who have a mortgage where the payment is applied when made have a huge advantage because the timing of the payment has an enormous impact on the total interest that accrues on the loan. However this is becoming less and less common.
There are multiple methods for calculating interest on your loan that are permissible from a regulatory standpoint. Not all of them are to your best interest. Some methods will actually accelerate the interest payments into the early portion of the the loan with principal payments being a larger component later in the life of the loan. This creates a disadvantage to people who like to prepay their principal.
Please look over the documentation of how the funds are applied and to see if you can do the same yourself without a fee.