|
|
|
The
Biweekly 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 "Biweekly 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 biweekly 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 biweekly 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funds are withdrawn from the trust account and forwarded to your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 biweekly 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 biweekly payment company, you may find yourself
digging into your personal savings to make the payment directly
-- even though the biweekly payment company has already
collected your funds.
Later you can work out the trust account problem with your
biweekly payment company.
The Cost of the Biweekly 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 Biweekly Mortgage
By making principal reductions using the biweekly 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 biweekly 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 Biweekly Mortgage
Instead of hiring a company to manage your biweekly 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 biweekly 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 biweekly 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
biweekly 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 biweekly
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 biweekly 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 biweekly 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.
Lex Realty - Long Island's Oldest Real Estate Office
Serving Syosset, Woodbury, Jericho, Bethpage, Plainview, Muttontown, Laurel Hollow, the Brookvilles,
Oyster Bay, Oyster Bay Cove and all of the New York Area Real Estate
Communities
|
