With the promise of getting you mortgage free much sooner than regular monthly payments, some companies are marketing bi-weekly, bi-monthly or even weekly mortgage payments. How do these options really stack up?
Well first, watch out for enrollment fees or transaction fees. These can really take a bite out of what you are trying to do.
Second, understand how a mortgage works, and how your bi-weekly payments will be applied. In any standard mortgage that I can find (and I’ve talked with a bunch of banks, credit unions and mortgage outfits), the mortgage loan cannot accept partial payments. (If you know of a mortgage company that applies your partial payment right to your loan please let us know)! So when the first part of a bi-weekly payment is sent, where does it go?
It goes to the company’s escrow account! When your other payment(s) arrive that add up to an entire payment, the escrowed funds are released and applied to your mortgage balance.
Then how does a bi-weekly plan help me? With 26 two week periods, you’d be making an extra payment every year. On a 30 year mortgage, that can cut a few years off your payoff date!
But let’s go back to that first partial payment. Imagine your payment being mixed in with hundreds if not thousands of other partial payments. If they were all $600 payments, and there were 2500 participants, that’s $1.5 million dollars that company has use of for two weeks. Just imagine the interest they earn on your money. Now you know why companies don’t mind bi-weekly payments in the least bit.
I’d like to suggest an alternative to bi-weekly payments, and an alternative that will pay your mortgage even faster than a bi-weekly program! Here’s how it works:
Take your monthly payment amount and divide by 12. Then add this figure to your regular payment each month, applying the extra to principal. This FREE system would cut a 30 year loan down to about 21-22 years. Multiply your principal and interest payment by 12 then by 8 to see what you’re going to save. The number might surprise you!
Happy November everyone!
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