Saving Money With Biweekly Payment Plans
29434
Finance > Mortgage
Jun 20, 2007
elathrop
Saving Money With Biweekly Payment Plans
Someone told me he was saving lots of money because he switched his mortgage payment schedule to biweekly. He said it was a really great plan and that his mortgage would be paid, in full; several years ahead of his monthly payment schedule and that it would save him over $70,000! I told him I thought it was a great deal and then asked him how much it cost to convert to the biweekly plan. He said, "Nothing!" and then proudly stated, "and there is only a $19 charge added on to each payment!" Ouch! I didn't want to go into this more deeply, so, I just smiled, said "so long" and moved on. Here's the problem. Since I know his house is almost brand new; I figure he has 28 years left on his mortgage. The $19 charge he's paying every month to covert to the biweekly plan is costing him: 26 (payments per year), times 28 (years left to pay), times $19 (per payment). This adds up to a total cost of $13,832 for something he could have done for free! Most lenders, especially the high profile ones, don't charge this much for a biweekly mortgage conversion. More commonly, there is an upfront charge of anywhere from $800 to $1,300. Often times these high profile lenders do the biweekly conversion in conjunction with a refinance. When you go the refinance to a biweekly plan route, you usually only pay points and not a conversion fee per se, even though the payment plan you end up will be a biweekly one. If you pay 2 points for a $200,000 refinance, for instance, the cost is $4,000. With a refinance, usually you would be taking cash out of your equity, so if you don't need to do this and your new biweekly mortgage would have the same interest rate as your old mortgage, as you will see later, you would just be wasting money. The instance where this type of refinance to a biweekly plan would work is in a situation where you did want to take cash out of your equity and you were changing from a high interest rate mortgage, like 9% to a nice low one, like 5%. That would change everything. Let's see how good of a deal this would be. You are paying off; let's say an $180,000 mortgage. The interest rate is 9% and the full term of the mortgage is 30 years. On this mortgage the total interest and principal payment due is $1,448.32 each month. Now, you are able to refinance to a $200,000 mortgage at 5%. Here, your new monthly cost is $1,073.64 monthly or $536.82, which is half the monthly payment, paid every 2 weeks or, biweekly. If you've paid your old mortgage for 6 years you would have paid about $10,000 off of that mortgage. This means your old principle was $170,000 ($180,000 - $10,000). So, the refinance puts $30,000, minus the 2-point charge, in your pocket as well as lowering your monthly payment by $375 a month. Not bad even if you are paying $4,000 in points. Yeah! But what about the fact you've got to pay a mortgage for an extra 6 years? Well, here's where they will try to sell you the biweekly plan. If you pay $536.82 biweekly instead of $1,073.64 monthly, the mortgage will be paid in 25 years and 3 months, not too much longer than 24 years. However, what they are not so upfront about is that with a biweekly mortgage plan, you pay more toward your principle each month. There are 26 two-week periods in a year. So, 26 biweekly payments equal 13 yearly payments. This works out to the same as paying 1 and 1/12th payments each month. Of course, paying this extra fraction of a payment every month, is the real secret to how biweekly plans work. The plain and simple fact is; if you pay 1/12th of a monthly payment extra every month, you will pay off your mortgage in the same number of payments it would take to pay off the mortgage with the biweekly plan. The refinance, itself, would still be a propitious move but, personally, I'd opt for the monthly plan if I were doing it. I'd rather be liable for as low a monthly payment as possible. I still could pay extra each month and pay this mortgage in 25 years, or a lot sooner if I chose to. However, maybe a few years down the road interest rates would be high. If so, I'd be making more money by taking the extra money that would have been going toward the biweekly payment plan and putting it in a savings account, or better yet, a hot Mutual Fund. So don't be caught off guard if approached by a salesperson who is intent upon converting your mortgage to a biweekly plan. While a refinance can be beneficial in many circumstances, a biweekly plan never is because you can just as easily make larger than required payments without one.
Ed Lathrop is a successful Real Estate investor. He has developed EzCalculator, a Mortgage Calculator that calculates anything to do with mortgages, shows you how to pay off credit card debt and much more. EzCalculator includes the famous ?How to Make $100,000 on Your Mortgage? calculator. There are no popups or spyware at this site. Come visit this free site at Free Mortgage Calculator!
send email to elathrop
Write a Review
Add to My Favorite
Refer it to Friend
Report Article
Other links owned by this user
One of the basics of wealth building is leverage. Knowing how leverage works will give you a leg up in your quest for success. This article explains the ins and outs of leverage, and then some.
Category:
Many lenders will try to get you to take a mortgage that will work best for them. Here are 5 of their liitle tricks to look out for.
Category:
The first step to becoming rich in real estate is learning the theory behind it. Real estate investors don't have schoolbooks to fall back on to learn this theory. All they have are courses, usually written by entrepreneurs who themselves are trying to be
Category:
Many articles, books and courses have been written about making money in real estate. All of these articles, books and courses assume the price of real estate is rising. What happens when the price of real estate is falling? Here is how investors make mon
Category:
Many people don't realize the politics of Hillary Clinton are different than that of her husband, former president Bill Clinton. This article examines one extreme difference.
Category:
Many people feel it is impossible to get ahead today. With the sky high prices of gasoline and rising interest rates, making ends meet seems to be a very difficult task. Are we doomed to financial failure? Let's see how it is possible for one struggling i
Category:
For some reason, people who work hard and make a good living are seen as evil. The truth of the matter is people who make a lot of money often start out broke and end up providing jobs for those who need them. Real estate investors are probably the most m
Category:
Applying for a mortgage can make anybody uneasy, even people who have had mortgages before. Are you sure you're not going to be taken? Here are 10 questions you can ask the Loan Originator that will make you sound like a seasoned pro and put him on the de
Category:
There is such a thing as a good credit card. However, many credit card companies have gotten way out of hand and are now an assault to your finances. How do you recognize cards that have been issued by these companies and what should you do about them?
Category:
There are huge profits to be made from buying and fixing up run-down properties and selling them. This article gives advice on how to get started in this lucrative field.
Category:
Is refinancing and changing your payment plan to a biweekly plan a good deal? Well, mabe the refinancing part is.
Category:
Trying to determine the roll a point plays in a mortgage's overall attractiveness can be very confusing. This article explains when paying points is a detriment or a benefit to a borrower.
Category:
Other links at Finance > Mortgage
The current bills in congress are going to change the way the FHA does business
Category:
Reverse Mortgages are not short term, hard money, bridge or balloon loans normally associated with the type of loans people are forced to get to stop a foreclosure proceeding.
Category:
Legislation has been introduced that will empower the Federal Housing Administration (FHA) to become a more efficient ovider of financing for affordable homeownership and rental housing. The oposed law -- S. 3173, ?The 21st Century Housing Act? --
Category:
We all want to own property. Some of us dreamed of having a house from a very early age but of course we never know anything about mortgages, home loans, bonds and terms like debt consolidation. So what it is a mortgage? Is it as complicated as it sounds?
Category:
When it comes to a reverse mortgage, wise consumers weigh the advantages and disadvantages prior to signing on the dotted line. Let?s start on a positive note, you could do what most borrowers do and opt for the reverse mortgage line of
Category:
Site Sponsor
Directory Statistics
Articles: 68252
Categories: 501
Yahoo Entertainment
