Many current home owners as well as new home buyers ask about the bi-weekly
mortgage. They have heard that the borrower can save thousands of dollars in unpaid
interest while paying the mortgage off early. The plan requires that one-half
of the mortgage payment be made every two weeks. this
results in making 26 one-half payments or one full extra payment every year.
Most borrowers know that they can save money by paying even small extra
amounts to reduce the principal balance quicker. Most lenders now offer the
bi-weekly plan. Additionally, home owners often receive notices from companies
who will arrange such a payment plan. BE CAREFUL! In most cases, the lender
and/or the company will charge $350 to $750 as a one time fee to initiate the
service. Plus, there is usually a monthly charge for maintaining the service.
The process involves simply collecting the bi-weekly payments via an automatic
deduction process from your checking account and then making the "one
extra payment" for the borrower at the end of each year. With a bit of
self discipline, a home owner can do it themselves.
One way to do it . . . deposit one twelfth of the monthly payment into a savings
account each month. In November, write a separate check for the "one extra
payment" amount and send to the lender with a note indicating that the
payment is for "principal paydown only".
This will enable a borrower to identify within sixty days (when the lender
provides their year end statement regarding loan balance, interest paid, etc.)
that the lender has credited the account accurately. Some feel that this
"one payment" method is better than a small additional monthly
payment made to principal paydown.
HERE ARE A FEW USUAL QUESTIONS
1. WILL IT WORK ON ANY LOAN? Absolutely! FHA, VA, USDA and Conventional
loans, both fixed and adjustable rate mortgages, 30 or 15 year terms. One can
save money regardless of the type of current loan.
2. WHEN CAN ONE START? The sooner the better! Whether one has a brand new
loan or has been making payments for months or years, money can be saved in the
form of unpaid interest. It works for both new and existing loans.
3. HOW LONG DOES ONE HAVE TO PARTICIPATE TO MAKE IT WORTHWHILE? Money is
saved the very first payment, but the longer one participates, the greater the
savings in unpaid interest and the shorter the payoff term. It is advised that
one retain their own record of extra payments and an
analysis of the benefit via year by year savings. Here's an example of the
possible savings on a $100,000 loan at 8% interest:
Mortgage Paid Off: 30 years 21 years
Total Interest Paid: $164,155 Interest
paid via bi-weekly basis:
Total Interest Saved: $ 57,407
4. IF I DON'T PLAN TO STAY IN THE HOME FOR 20 YEARS, IS IT STILL A GOOD
THING TO DO? It might be! An analysis of the current loan situation can
identify the possible savings over the next several years and assist in your
decision making. Generally, it is a good plan for practically everyone . . .
simply because it initiates a habit that saves money immediately and also a
habit that hopefully would continue with any new mortgages acquired.
5. SHOULD THE PLAN ONLY BE USED WITH A PERSONAL RESIDENCE? The same kind of
savings will occur with any mortgage, including mortgages on rental or
commercial properties. It is best to analyze each mortgage separately to
determine the savings that could occur. This plan could be particularly good
for persons hoping to retain and use rental property for future income purposes
by paying off the mortgage early.
If you require more information, call Humboldt Home Loans and speak to a