The
Bi-Weekly Mortgage - Who Needs It?
Have you received an advertisement
offering to save you thousands of dollars on your thirty-year mortgage
and cut years off your payments? With email "spam" becoming
more pervasive as everyone tries to "get rich quick" on the
internet, these ads are popping up with troublesome regularity.
The ads promote the "Bi-Weekly
Mortgage" and for the most part, do not come from a mortgage
lender. Exclamation points punctuate practically every claim:
- No closing costs!
- No refinancing!
- No points!
- No credit check!
- No appraisal!
- Save thousands!
- Cut years off your mortgage!
To achieve these wonderful savings all
you have to do is allow half of your mortgage payment to be deducted
from your checking account every two weeks. It�s easy. Of course,
there is a small "set-up fee" and usually a "transaction
fee" with every automatic deduction.
Essentially, the ads are truthful in
almost every respect.
They just want to charge you money for
something you can do on your own for free.
The Basics:
Normally, you make twelve mortgage
payments a year. Since there are fifty-two weeks in a year, a bi-weekly
mortgage equals 26 half-payments a year. The equivalent would be making
thirteen mortgage payments a year instead of twelve. By applying that
extra payment directly to the loan balance as a principal reduction,
your loan amortizes more quickly, requiring fewer payments.
You save money. The ads are true.
How it
Actually Works:
You cannot simply mail in half a payment
every two weeks to your mortgage lender. Since they do not accept
partial payments for legal and accounting reasons, the mortgage company
would just mail your half-payment back to you.
Instead, the bi-weekly mortgage company
is an intermediary between you and your mortgage lender. They
automatically debit your checking account every two weeks for half of
your mortgage payment, then place your funds into a trust account.
Basically, this is just a holding account for your money. In another two
weeks, there is another automatic deduction from your checking account,
and so on. When your mortgage payment is due, your funds are withdrawn
from the trust account and forwarded to your mortgage lender.
Since you are placing funds into the
trust account faster than your mortgage payments are due, you eventually
accumulate enough money to make an "extra" payment. The way
the cycle works, this occurs once a year. The extra payment is applied
directly to your principal balance, which causes your loan to amortize
faster, pay off more quickly and save you thousands of dollars.
Potential
Problems with the Trust Account
Because your funds are held in the trust
account until your mortgage payment is due, there are potential dangers.
Not only are your funds held in this account, but so are the funds of
everyone else enrolled in the bi-weekly program. That is a lot of money.
Most likely, there will be no problems.
However, if there are accounting errors,
mismanagement, or even fraud, your mortgage payment might not get made.
The first hint of a problem will probably be a phone call or letter from
your mortgage lender, but not until after your payment is already late.
Since responsibility for making the payment rests with you and not the
bi-weekly payment company, you may find yourself digging into your
personal savings to make the payment directly -- even though the
bi-weekly payment company has already collected your funds.
Later you can work out the trust account
problem with your bi-weekly payment company.
The Cost
of the Bi-Weekly Mortgage
There is usually a set-up fee that runs
between $195 and $350, depending on how much sales commission is paid to
the individual or company setting up the account for you. You also pay a
transaction fee each time there is an automatic deduction from your
checking account and sometimes also when the payment is made to your
mortgage lender. There may also be a periodic "maintenance
fee."
Meanwhile, whoever controls the trust
account is earning interest on your money.
Savings
of the Bi-Weekly Mortgage
By making principal reductions using the
bi-weekly mortgage program, your mortgage will amortize more quickly,
saving you money. How quickly your loan pays off depends on your
interest rate and when you begin making the bi-weekly payments.
On a $100,000 loan at today�s interest
rate of eight percent, your first principal reduction would probably be
a year from now. Assuming the principal reduction is equal to one
monthly payment ($733.76), you would save $43,852 over the life of the
loan and pay it off almost seven years early.
However, you have to deduct from those
savings any amounts you paid in set-up, transaction, and maintenance
fees.
No-Cost
Alternatives to the Bi-Weekly Mortgage
Instead of hiring a company to manage
your bi-weekly payment, you could accomplish essentially the same thing
on your own for free. Just take your monthly payment, divide it by
twelve, and add that amount to your monthly mortgage payment. Be sure to
earmark it as a principal reduction.
The first way you save is that you do not
have to pay any fees to anyone. It�s free.
In addition to not paying fees -- using
the same example as above -- your total savings on the mortgage would be
$45,904. Plus the loan would be paid off three months quicker than with
the bi-weekly mortgage. The reason you save more is because you are
making a principal reduction each month, instead of waiting for funds to
accumulate so that you can make one principal reduction a year.
Self-Discipline?
The bi-weekly mortgage companies claim
that homeowners are not disciplined enough to follow through with
principal reduction plans on their own. They suggest the reason for
setting up the bi-weekly mortgage enforces discipline upon you, and by
doing so, they save you money.
However, in this internet age, banking on
line and automatic deductions are readily available. You can set up your
own automatic deductions including the additional principal reduction
and have it go directly to your mortgage lender. Since the deduction
occurs automatically, just like with the bi-weekly mortgages,
self-discipline is not a problem. Once again, you don�t have to pay
anyone to do it for you and you save even more money.
Conclusion
The bi-weekly mortgage plans do not
really do anything except move your money around and charge you for it.
Plus, even though the danger is negligible, you must trust someone else
to hold your money for you. If you can do the very same thing for free,
plus save yourself even more money by doing it on your own, why pay
someone else?
The bi-weekly mortgage plan � who needs
it?
If your goal is principal reduction and
saving money, then it is a good plan. If you do it on your own instead
of paying someone else to do it for you, then it is a great plan.
copyright
HomeLoanABC, RealEstateABC 2000
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