Bi-weekly mortgage program? - Posted by Patrick

Posted by Jay_TN on July 10, 2001 at 17:20:40:

When I got started, I always feared debt. I wanted to buy one rental house, pay it off, and THEN buy another house. Then, I started thinking. I’m responsible. I can think and make decisions. I can manage finances. Why can’t I use someone else’s money to build wealth? Borrow the money, deduct the interest, and YOU enjoy the benefits of the money working. Basically, somebody, somewhere in the US of A is putting their $10k in a CD at a bank. I’m borrowing it for slightly more than they are getting in interest. Great deal!!!

Good call, Bob.

Regards,
jay

Bi-weekly mortgage program? - Posted by Patrick

Posted by Patrick on July 10, 2001 at 12:49:47:

I recently bought a new house for myself, and so now I’m getting bombarded with all sorts of offers in the mail. But one of them caught my eye – a bi-weekly mortage program. Basically you cut your monthly mortage payment in half and pay half every 2 weeks instead of paying the full amount monthly. Everything stays the same except at the end of the year it works out to you paying 13 times instead of 12 times. Supposedly this cuts 7-9 years off the 30 year mortgage, my equity builds up twice as fast, and my PMI will be eliminated in half the time. It sounds logical to me … has anyone ever gone this route? What is the general consensus on this type of a bi-weekly program? Thanks!

Re: Bi-weekly mortgage program? - Posted by dewCO

Posted by dewCO on July 11, 2001 at 14:47:32:

Cathryn is correct, however, call the lender first and see how they want the extra payment sent in to them… Some want a separate CHECK.

I never recommend doing this unless you REALLY, REALLY want to own the house free and clear. If you do then fine, but if not then don’t bother with doing this. Keep you money and invest it—maybe another piece of real estate. I’d never rush to give the bank more than they require without a might good reason to do so. Bit never PAY a fee to have anyone set up such a program.

And even if you want to own it free and clear. You can still invest the extra money each month in another piece of real estate, and then in later on down the road, pay off the balance on your current home with the profits from the sale of your extra piece of RE. You could have your cake and eat it too! Think it through before you give the bank any more money than they require. You aren’t going to get back any money you give the bank!

Re: Do it yourself…the easy way! - Posted by Cathryn

Posted by Cathryn on July 10, 2001 at 20:07:31:

Patrick:
I agree that you don’t need to pay someone to set up an early pay program for you. You can make extra principal payments on your mortgage yourself, quite easily. I’ve been doing it using this method for six years, and I’ve already cut five years off my mortgage.

Here’s how it works: First, go look at your mortgage documents. Check to make sure you have no prepayment penalties on your mortgage agreement. If you have a low interest rate, you probably don’t, but check.

Then, look for your mortgage’s amortization table. Your lender should have provided one. This is a document that gives you the breakdown of your payments into principal and interest, month by month over the term of your loan. It’s a document every mortgage holder should study, because it’s a real eye-opener. Just for grins, check how much you’ve paid in interest and how much you’ve decreased the balance of your loan by paying on the principal at the ten-year mark. I think you’ll be shocked at how little prinicpal you will have paid.

Now, here’s my method. Make a regular mortgage payment next month. (We won’t include the taxes and insurance in this discussion, just the principal and interest.) At the same time you send in your regular payment, add an extra principal payment. You’ve now cut one payment off the term of your loan!

For example, my regular payment (P&I) is $405.55 a month. The first time I made a payment on this loan, I added the principal payment for the next two months, which were $43.31 for the second month and $$43.58 for the third month. I actually made two extra principal payments, for a total payment, not counting taxes and insurance, of $492.44. I now had only 357 more payments to make instead of 359. I marked on my amortization table what I had paid: the whole $405.55 for the first payment, and the $40 amounts for the second and third.

The beauty of this system is that you are always in control. You can make one extra payment each month, skip extra payments during months when you need the money elsewhere, make a lot of extra payments if you get a bonus or extra income from somewhere…it’s up to you. It’s especially good to do this when you have a new mortgage, because the principal payments are relatively low. As they grow higher, you can make an extra payment every two months, or three months, whatever works for you! And because you are making exact principal payments, and marking them on your amortization table, you will always know exactly what your balance still owed is, which isn’t true if you make extra payments that are arbitrary.

A few more comments: If you send in a coupon with your payment, be sure that you state on that the extra amount you’re sending in, and DESIGNATE IT AS A PRINCIPAL PAYMENT. Lenders tend to stick extra money you send them into escrow to pay your taxes and insurance if you don’t tell them it’s principal. I would also write on the check’s comments section “Payment includes $xx.xx extra principal paynment”…then keep the checks in case the bank ever disputes your payment history.

So… use your amortization table, check your mortgage documents (and with the bank too) to make sure you have no prepayment penalties, make as many extra principal payments as you’re comfortable with each month, make sure you specify when you send the payment in that it’s principal, mark off your payments on your A table…and that’s it! If you have any questions, e-mail me and I’ll send you my phone number to call. Good luck!

Re: Bi-weekly mortgage program? - Posted by Rich

Posted by Rich on July 10, 2001 at 13:25:34:

Patrick,

DO NOT pay some company $400 plus the monthly service charge to set this SYSTEM up for you. You can accomplish this yourself for free. There are a couple of ways to do this. Here is one of the easiest and straight forward ways. Take your monthly payment, minus taxes and insurance, divide it by 12 and submit that amount as an additional principal payment.

For example: Current monthly payment $900, divided by 12(months) equals $75. Your new monthly payment becomes $975. Make certain you specify the added payment is for principal only.

Again, this is just one way to reduce your time from 30 years to approximately 22 years. There are other methods as well. You can put this on automatic pilot by having your mortgage company withdraw the amount directly from your checking account. No more late fees, lost checks, buying stamps, etc…

Best of luck and congrats on the new house.

Rich

Re: Bi-weekly mortgage program? - Posted by James Harris

Posted by James Harris on July 10, 2001 at 13:06:24:

I believe that any one who owns property need to be on this program. There are those who feel otherwise. You have made one miscalculation, the program work out sa that you cut 7-9 years off the 30 year mortgage the PMI will not be eliminated in half the time ( about 7-9 years. However, if you can afford about a 20% higher payment, you can cut eliminate your PMI in half the time. This can be achieved by either adding the extra to your mortgage payment or putting the money into a savings plantha after 15 years you will have the money to pay off the property.

Not only… - Posted by Paul_MA

Posted by Paul_MA on July 11, 2001 at 01:19:24:

…are you decreasing the term of your loan, you are saving major dollars in interest over the life of the loan.

Good post! (nt) - Posted by Carey_PA

Posted by Carey_PA on July 10, 2001 at 22:21:36:

.

I guess the bottom line is … - Posted by Bob

Posted by Bob on July 10, 2001 at 13:33:38:

…whether or not you can earn a higher rate of return on your money somewhere else. Yes these bi-weekly programs help pay off your mortage faster BUT that is only because you are making the equivalent of 1 extra monthly payment every year. Many people, myself included, believe that a mortgage at (6-8%) is VERY cheap money … and chances are you could earn a higher rate of return on that money some other way.

Re: Not only… - Posted by Cathryn

Posted by Cathryn on July 11, 2001 at 06:51:06:

Absolutely. By the time I’d make 43 extra principal payments, I added up the interest I’d have paid if I’d made these as regular payments instead. The savings at that point was nearly $15,000 dollars.

I would like to add that doing this is especially useful if you are going to live in your house for a long time. If you’re only planning to stay in your house for a few years, making extra principal payments (unless you make a lot of them) will only increase your equity by a relatively small amount when you pay them at the beginning of a mortgage. In that case, you might be better off putting the extra money in an investment that will earn you rates of return higher than your mortgage interest rate. But if you plan to stay in your home for a long time, and you want to save huge amounts of interest and pay the loan off early, this is a good idea. Skip the bi-weekly method; who wants to try to remember to write a check every two weeks anyway?

Re: I guess the bottom line is … - Posted by bob (pa)

Posted by bob (pa) on July 10, 2001 at 14:46:06:

I agree… If you tax effect the interest rate, it is even cheaper then the 6 to 8 %. However, if you want to pay your mortgae off early, just pay an additional 1/12 with each payment & save yourself the cost of converting. This is the way that I do it.

Bob