Save Tens of Thousands of Dollars But Avoid the Scams
It's true, but beware! There are many different versions of these plans, and not all of them will save you much, if any, money. Some of them are outright rip-offs. Here's what you need to know.
The Savings
First, the facts: on a $100,000 30-year mortgage at 6.5%, you'll pay $127,544 in interest, plus the $100,000 principal, for a total of $227,544. Paying one-half of your regular monthly mortgage every two weeks will result in interest of $97,215, a savings of $30,329. You'd have to earn over $42,000 before taxes to net that much money.
The larger your mortgage, the more dramatic the savings. On a $200,000 mortgage, you'll pay $255,088 in interest, plus the $200,000 principal, for a total of $455,088. Paying one-half your regular monthly mortgage amount every two weeks will result in interest of $194,430, a savings of $60,658. You'd have to earn at least $85,000 before taxes to net that much money.
Most mortgages can be pre-paid without penalty, but some mortgages in the secondary market (where many people with questionable credit have to go for a mortgage) have a penalty for pre-payment. Check with your lender.
You can achieve the benefits of pre-paying your mortgage without converting to a special type of mortgage or paying a fee. All it requires is discipline.
Know What To Look For
In order to build equity in your home more quickly, you must have a lender that will immediately credit each 1/2 monthly payment upon receipt. If your lender waits until the second payment has been received before crediting your loan, you'll never see the benefits.
Many companies will offer to "convert" your mortgage to a bi-weekly mortgage payment plan for a fee. They'll automatically withdraw the payments from your bank account every two weeks. Read the small print on such plans. Many of them only pay your lender once a month, so the extra payment doesn't get applied to your loan until the end of the year. In the meantime, the company has been earning interest on your money as well as charging you a sometimes outrageous fee.
Watch out for the bi-monthly mortgage, which is not the same as the bi-weekly mortgage and does NOT achieve the same results. With a bi-monthly mortgage, you pay one-half your monthly mortgage twice a month as opposed to every two weeks, so you don't make an extra payment over the course of a year. You save only one month's interest on a 30-year mortgage instead of seven year's interest!
What You Need To Do
- Check with your lender or read the fine print of your mortgage document to make sure there's no penalty for pre-payment.
- Ask your lender how they'll treat your bi-weekly payments (apply each payment immediately to the principal or wait for the second half of the payment to arrive?).
- Whenever you include additional money in your payment, make sure you include a note that it is to be applied to the principal, not to the next month's payment.
- Check on your lender to make sure the extra payments are being applied to your principal. If you're making bi-weekly payments, it's easy to determine what your principal balance should be; just plug your mortgage amount and interest rate into Bankrate's Bi-Weekly Mortgage Payment Calculator.
Other Options For Saving Big Bucks On Your Mortgage
You can achieve the same benefits of a bi-weekly mortgage by making your monthly mortgage payments as usual, but making one additional payment each year. The difficulty with this method is that you have to come up with a large lump sum at one time.
Another method is to pay an extra 1/12th of your monthly payment each month. If your payment is $700, pay $758 each month ($700 divided by 12 = $58). After 12 months, you'll have made the equivalent of an extra month's payment.
Coming Up With the Money For the Extra Payment
There are ways to come up with the money to make an extra payment a year, including:
- Use your income tax refund.
- If you receive a bonus at work, apply it to the principal on your mortgage.
- Pay an extra $25 or $50 or $75, or as much as you can afford each month when you pay your mortgage.
Using one of these methods to pre-pay your mortgage is probably the best opportunity you'll ever have to save tens of thousands of dollars so easily.
The Bottom Line
You don't have to pay to convert your mortgage to a bi-weekly. Commit to exercising the discipline necessary to pay additional principal on your mortgage equivalent to at least one full mortgage payment a year, whether you do so in bi-weekly or monthly increments or all at once at the end of the year.
Remember, you don't need to pay any fees to achieve the benefits of the bi-monthly mortgage on your own, as long as you have the discipline to stick with it.
