November 4th, 2014 4:51 AM by Jackie A. Graves, President
of starting a bi-weekly mortgage payment plan? You may want to think
again. A bi-weekly plan may sound terrific, but it's a
program with risks.
rates today below historical norms, there may be better, less
expensive ways to own your home faster.
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TYPICAL MORTGAGE : 12 PAYMENTS PER YEAR
typical mortgage asks for one payment per month, which equals 12 payments per
year. With a 30-year fixed rate mortgage, therefore, 360 payments are required
to pay the loan in full.
mortgage payment is split into two parts -- a principal portion and an interest
portion. The principal portion is applied to the amount that you owe the bank.
This diminishes your remaining loan balance. The interest portion is your
cost for borrowing from the bank.
your loan moves toward maturity, the balance between your mortgage payments'
principal-and-interest shifts. In the early years, a significant portion of
your payment is comprised of interest and just a small part goes to paying down
your balance. It's not until later in your loan's lifecycle does the
principal portion of the payment start to grow.
repayment schedule is the reason why after 5 years or so, your loan's balance
has been barely paid down. The technical term for this repayment schedule
is amortization (ah-mor-ti-ZHAY-shun).
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BI-WEEKLY MORTGAGE PAYMENTS : 13 PAYMENTS PER YEAR
bi-weekly mortgage payment program is meant to short-circuit your loan's
amortization schedule. Instead of taking 12 payments per year, the bi-weekly
payment plan asks for one payment every two weeks, which adds up to 13 payments
that you can't make 13 payments per year on your mortgage -- that's not how a
a mortgage, you pay a certain amount of interest on an annual basis and that
amount is covered in your first twelve payments. The 13th payment has to
go somewhere, though, so it gets applied to your principal balance; the amount
that you still owe to the bank.
this is how a bi-weekly payment plan works. With each "13th
payment", your loan balance is reduced by the entire amount of the
payment. You reach your loan's payoff date sooner.
today's mortgage rates, bi-weekly payments shorten your loan term by 4 years.
Click to get bi-weekly mortgage rates.
EFFECTIVE ALTERNATIVES TO BI-WEEKLY PAYMENTS
payments plans work; there's no doubt about that. It's just basic math.
However, there are several reasons why homeowners may want to avoid enrolling
in a bi-weekly mortgage payment plan.
first -- and most obvious -- reason to avoid bi-weekly mortgage payment
programs is that homeowners choosing to self-manage their bi-weekly payments
get better results than via a bank-managed bi-weekly payment program.
how to self-manage : Rather than sending payments to the bank every other
week, achieve the same result by making your regular mortgage payment once
monthly, and adding 1/12 of your regular mortgage payment to your check.
every $1,200 in your mortgage payment, in other words, add $100 to your monthly
payment. By sending $1,300 to your lender monthly, you will
"overpay" your mortgage by $1,200 annually, which is a 13th payment.
a $300,000 mortgage at 4.000%, look at how the math works :
math works because banks don't apply that 13th payment until the year is
complete. By contrast, your self-managed system applies 12 times per year.
reason to skip the bi-weekly mortgage program is that bi-weekly payments are a
contract and once that contracts starts, as a homeowner, you're obligated to
make those 13 payments per year no matter what.
contrast, with a self-managed payment plan, you never have that
obligation. You can choose to skip a month during the holidays, for example,
then double-up on payments later on, or not at all. It's all in your control --
not the bank's.
lastly, if you find your bank is charging for its bi-weekly mortgage payment
program, make sure to say "no" no matter what. That's just wasted
COMPARE YOUR PAYMENT SCHEDULE OPTIONS
bi-weekly mathematics aside, the thing is, with mortgage rates low, your best
alternative to the bi-weekly mortgage plan may be to get a new mortgage
payments can speed up your payoff, but not as well as taking a zero-closing
cost refinance, then putting your monthly savings back to your loan
balance. Your payment stays the same, but your loan payoff date
a 1 percent drop in your mortgage rate, the Refinance-and-Reinvest plan can shorten
your loan's term 63% more than a bi-weekly mortgage payment
program ever could. Plus, with lower interest rates comes larger long-term
a look at today's live mortgage rates and compare your mortgage options. Rates
are available online at no cost and with no obligation whatsoever.
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