Should You Consider a Bi-Weekly Mortgage Payment Program?

bi weekly mortgageThinking 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 not without its risks.

There may be better, less expensive ways to own your home faster.

Typical Mortgage : 12 Payments Per Year

The 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.

Each 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.

As 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.

This 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.

Bi-Weekly Mortgage Payments : 13 Payments Per Year

A 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 per year.

Except that you can’t make 13 payments per year on your mortgage — that’s not how a mortgage works.

With 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.

And, 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.

At today’s mortgage rates, bi-weekly payments shorten your loan term by 4 years.

Effective Alternatives To Bi-Weekly Payments

Bi-weekly 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.

The 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.

Here’s 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.

For 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.

Assuming a $300,000 mortgage at 4.000%, look at how the math works:

  • Bank-managed bi-weekly mortgage payments pays off in 26 years, 0 months
  • Self-managed bi-weekly mortgage payments pays off in 25 years, 11 months.

This 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.

Another 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.

By 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.

And, 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 money.

Compare Your Payment Schedule Options

Putting 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 altogether.

Extra 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 accelerates.

Assuming 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 savings.

Call me if you would like to check current mortgage rates and see how much you can save over the life of the loan.

 

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What’s Ahead For Mortgage Rates This Week – November 4, 2013

Whats-Ahead-Mortgage-Rates-5Last week’s economic news came from a variety of sources. Most significant was the Fed’s Federal Open Market Committee statement after its meeting ended Wednesday. The statement indicated that the Fed saw moderate economic growth. FOMC did not taper its purchase of MBS and Treasury securities.

The FOMC statement announced the committee’s intention to closely monitor economic and financial developments ”in the coming months,” which suggested that the FOMC is taking a wait-and-see position on reducing its $85 billion monthly asset purchases.

Mortgage Rates, Jobless Claims Fall

The Fed’s asset purchase program, also known as quantitative easing, was implanted in 2012 with a goal of stabilizing mortgage rates and other long-term interest rates.

The National Association of REALTORS® reported that pending home sales fell by 5.60 percent in September. Uncertainty over the FOMC’s decision concerning tapering its asset purchases during its September meeting and concerns over a then potential government shutdown.

These were noted as primary reasons for the drop in pending home sales, which are measured by signed real estate contracts. Pending Home Sales are used for estimating future closings and mortgage loan activity.

Tuesday’s economic reports included the Case-Shiller Home Price Indices for August. Home prices increased by 12.80 percent year-over-year in August as compared to 12.30 percent year-over-year for August 2012. August’s reading shows a dampened pace of rising home prices.

The Conference Board, a research organization, reported that consumer confidence fell from a reading of 80.2 in September to 71.2 in October. A reading of 75.00 was expected, but consumer confidence crashed as the government shutdown and its consequences diminished consumer and investor confidence.

According to ADP, a payroll administration firm, private-sector payrolls came in well shy of the expected 150,000 new jobs with a reading of 130,000 jobs. October’s reading was also lower than September’s reading of 145,000 new jobs.

Weekly jobless claims brought good news; new jobless claims came in at 340,000 and fell by 10,000 new claims from the previous week’s 350,000 new jobless claims. Expectations had been for 335,000 new jobless claims.

Freddie Mac reported that average mortgage rates fell. The rate for a 30-year fixed rate mortgage dropped by three basis points to 4.10 percent, with discount points down from 0.80 percent to 0.70 percent.

The average rate for a 15-year mortgage fell by four basis points to 3.20 percent, with an uptick in discount points from 0.60 percent to 0.70 percent. The rate for a 5/1 adjustable rate mortgage dropped by four basis points to 2.96 percent with discount points unchanged at 0.40 percent.

Whats Coming Up

There is no housing or mortgage economic news scheduled this week other than Freddie Mac’s PMMS due on Thursday.

Reporting for this week includes Leading Economic Indicators, Weekly Jobless Claims, Non-farm Payrolls and the National Unemployment Rate will be posted. The University of Michigan’s Consumer Sentiment Index will be released Friday.

This week’s economic reports are expected provide a general gauge of the economy and information about how consumers are responding to recent economic events and news.