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Myths About Bi-weekly Mortgage Payments
It's amazing how many people think bi-weekly mortgage
payments save you money through some mystic hocus-pocus.
That's because in many borrowers' minds, "bi-weekly"
translates as "half a regular mortgage payment, twice a
month." If such a technique could cut years off the term of
your fixed mortgage, (or reduce the total interest paid on an
adjustable rate loan) it would be magic indeed.
But that's not what's happening.
Yes, you might make a half-payment on the 1st and the 15th
of a month. But bi-weekly means "every two weeks", and you'd
owe another half-payment on the 29th. The next month you
would indeed pay only twice, but sooner or later, another
three-payment month will show up.
If you pay every two weeks, that means 26 half-payments a
year, the equivalent of 13 full payments. And it's that extra
payment, applied entirely to principal once a year, that works
the magic.
Your bank's computers are not set up to handle
half-payments, and if you tried sending them in, you'd soon be embroiled in a
confusing late-payment hassle. If you do want
to achieve the same results, cutting approximately nine years
off a 30-year loan, you can try one of three systems:
If your lender offers it, enroll in its own bi-weekly
payment plan. A few mortgage companies make the option
directly available to their borrowers.
Join a plan offered by an outside company that will
take half-payments automatically out of your bank or checking
account every two weeks, forward regular payments on your
behalf to your lender, and once a year send in the 13th
payment that has accumulated. They'll instruct the lender to
apply the extra money entirely to reducing your principal and
therefore your remaining term more quickly than originally
scheduled.
Some service companies charge around $350 for enrollment
in the plan, then levy a small monthly handling charge. They
also make their money on the "float" while they are holding
your money.
And third, if you have the discipline, you can
accomplish the same thing yourself, by simply accumulating one
full payment during the year, and sending it in with a
separate check, clearly marked "to be applied entirely to
principal." And you'll have the $350 enrollment fee you
saved, to get you started.
And it won't make much difference when in the year you
make that extra payment.
No mystical hocus-pocus involved.
Written by Edith Lank
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