Bi Weekly Mortgage Payments

[student]

Does anybody here make two payments a month? From what I've read it can make a big difference in the payments to principle. I haven't been able to find a bank that will apply both payments to principle at the time of payment. Any suggestions or referrals for me look into or avoid?

[muddpuppy]

Does anybody here make two payments a month? From what I've read it can make a big difference in the payments to principle. I haven't been able to find a bank that will apply both payments to principle at the time of payment. Any suggestions or referrals for me look into or avoid?

Yeah they won't do that for me either Guessing it dips too far into their pockets. I do the Bi weekly payments +$25 so in essence I pay an extra 50 per month and get the extra payment at the end of the year. I like the auto pay but hate the fact that they hold half payment for 6 months intrest free though

[theoilman]

There are some that have early pay-off penalities that just won't accept any extra payments.

If you don't have a pay-off penality clause you should be able to pay any extra early and get all the extra off the principal immediately. Mine takes any extra payments any time I pay them and gives me full principal credit immediately.

[rbandsasha]

If you do find a place that allows you to do make to this make sure you do not get charged for it. After having signed up for it we then started going through our finances with a fine tooth comb and realized that we were actually paying for this.

I strongly suggest taking Dave Ramsey's Financial Peace University to give more insite to personal finances. This course changed the lives of my wife and me.

[BobT]

I wonder if bi-weekly payments are really worth the hassle. I guess savings is savings but the reality is that the savings are not that significant. If you visit Crown Financial Ministries’ HSOforum you can find a simple calculator that will show you the payments and the total interest paid for a mortgage in both monthly and bi-weekly payments and see the difference for yourself. I ran the following mortgage to see and the result if I carried it to term. The result was a $289.46 savings over the term of the note.

$100,000.00

30-year annual 6% fixed rate mortgage.

Monthly:

Payment = $599.55

Total interest = $115,838.19

Bi-weekly:

Payment = $276.72

Total interest = $115,548.73

On the other hand, paying a little extra each month can result in much more significant savings. At Bankrate dot com I found a calculator that allows you to see what will happen if you pay a little extra each month. If you had the same mortgage and paid just $25.00 extra each month you would reduce your mortgage term by three years and save $13,939.66 interest charges. Now that's significant with little sacrifice.

$100,000.00

30-year 6% annual fixed-rate mortgage

Monthly:

Payment = $599.55

Total interest = $115,838.19

Payment = $599.55 + $25.00 applied to principal

Total interest = $101,898.53

[CJH]

The bigger the mortgage the more difference it will make.

Both doing the bi weekly payments and paying principal above your payment make a difference.

It will make a difference for us, so we are going to do it.

[jerkbait]

The only problem I have ever seenwith the bi-weekly program as that they charged $300-400 to sign up for it. All a person has to do add extra each month or once ayear themselves. No waiting or sign up fee.

[BoxMN]

I have always just rounded up my payment to next $5 or $10 value. Like if it was $1122.17 I would pay $1130.00 ... not sure how much it helps, but it doesn't cost anything to do, and you don't even notice the little extra.

[BobT]

The only problem I have ever seenwith the bi-weekly program as that they charged $300-400 to sign up for it. All a person has to do add extra each month or once ayear themselves. No waiting or sign up fee.

If there is a fee I'd watch really close how much it is and find out whether it is worth it. Even a $250,000 30-yr note at 8% only saves you about $1000 over the term of the note.

[huntingislife]

Not sure where you are getting your numbers Bob, but bi-weekly payments save a significant amount of money. We are saving about $35k in interest and paying off our loan 6 years earlier.

[muddpuppy]

BOB here is an example of bi-weekly I think you might be missing the 13th payment every year.

Using bi-weekly payments also reduces your total interest payments from $164,814 to $130,291. This is a total interest savings of $34,523.

Bi-weekly Payments Monthly Payments

Mortgage amount $200,000 $200,000

Escrow amount $350.00 $350.00

Extra payment $0.00 $0.00

Interest rate 4.500% 4.500%

Payment $681.69 bi-weekly debit** $1,363.37 monthly

Years to repay 24.5 years 30 years

Total interest $130,291 $164,814

Interest savings $34,523*

Compare to refinancing Using bi-weekly payments, you would pay the same amount of interest as refinancing your mortgage at 3.67%.*

[BobT]

Not sure where you are getting your numbers Bob, but bi-weekly payments save a significant amount of money. We are saving about $35k in interest and paying off our loan 6 years earlier.

Already indicated where I'm getting my numbers. Directly from a bank's HSOforum. Go to Crown dot org and dig around their tools page for their bi-weekly or monthly load calculator. Put your own numbers in and get the results instantly.

[CJH]

If there is a fee I'd watch really close how much it is and find out whether it is worth it. Even a $250,000 30-yr note at 8% only saves you about $1000 over the term of the note.

You need to recheck your numbers, they are not accurate. Here's an example from About.com Financial. On only a 100k note, it saves $30k.

Here’s an example. Let’s say your current monthly mortgage payment is $1,000. Over the course of a year you will spend $12,000 on twelve payments. If you decided to make bi-weekly payments you can then make a $500 payment every two weeks. Seems like the same thing, right? Well, if you take $500 and multiply it by 26 payments you have $13,000 in total payments. And guess what? That extra $1,000 was applied directly to your principal, thus reducing how much you’ll spend on interest and will pay your mortgage off faster.

To better understand the true savings, 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 payment every two weeks will result in interest of $97,215, a savings of $30,329. Obviously, the larger your mortgage and higher your interest rate, the greater the savings.

[Nick Kuhn]

That assumes he is paying every 2 weeks, and not just twice a month. You will save quite a bit paying every two weeks, you will not save much at all by just paying on the 1st and 15th of every month, due to the 2 extra payments.

[CJH]

You are right, however I thought the original poster was referring to Bi-Weekly payments. I think that's the confusion in the thread.

True Bi-Monthly isn't nearly as common as Bi-Weekly, as it does help but it is minimal.

There is a good table that breaks out the different options here (towards the bottom) Biweekly Mortgage

[tgruenke]

I use Bank of America. I like it just because it help break up my big expenses. there is a $4 auto pay charge.

[Tom7227]

State law seems to require they take it and not charge for it:

Minn. Stat. §58.137 INTEREST, POINTS, FINANCE CHARGES, FEES, AND OTHER CHARGES.

Subd. 2.Prepayment penalties.(a) A residential mortgage originator making a residential mortgage loan that is a prime loan to a borrower located in this state shall not charge, receive, or collect any prepayment penalty, fee, premium, or other charge:

(1) for any partial prepayment of the residential mortgage loan; or

(2) for any prepayment of the residential mortgage loan upon the sale of any residential real property, or the sale of any stock, interest, or lease relating to cooperative ownership of residential real property, securing the loan; or

(3) for any prepayment of the residential mortgage loan if the prepayment is made more than 42 months after the date of the note or other agreement for the residential mortgage loan; or

(4) for any prepayment of the residential mortgage loan if the aggregate amount of all prepayment penalties, fees, premiums, and other charges exceeds the lesser of (i) an amount equal to two percent of the unpaid principal balance of the residential mortgage loan at the time of prepayment, or (ii) an amount equal to 60 days' interest, at the interest rate in effect on the residential mortgage loan at the time of prepayment, on the unpaid principal balance of the residential mortgage loan at the time of prepayment.

( If a residential mortgage originator offers or makes residential mortgage loans to any borrowers located in this state with prepayment penalties, fees, premiums, or other charges exceeding the maximum amount under paragraph (a), clause (4), then the residential mortgage originator shall provide the following disclosure to each prospective borrower located in this state that requests a residential mortgage loan from the residential mortgage originator, whether or not the prospective borrower receives a residential mortgage loan:

THIS IS VERY IMPORTANT

THIS LENDER CHARGES YOU A SUBSTANTIAL PENALTY IF YOU PAY OFF OR REFINANCE YOUR LOAN BEFORE MATURITY. ASK THE LENDER HOW MUCH THE PENALTY WILL BE FOR YOUR LOAN.

The residential mortgage originator shall read the disclosure to the prospective borrower when the prospective borrower requests a residential mortgage loan, and again within three days before the borrower signs the note or other agreement for the residential mortgage loan. The residential mortgage originator also shall provide the disclosure to the prospective borrower in writing so that it is received by the prospective borrower within five days after the residential mortgage originator receives the prospective borrower's request for a residential mortgage loan, and again within three days before the prospective borrower signs the note or other agreement for the residential mortgage loan. The written disclosure must be stated in at least 16-point capitalized boldface type on a single sheet of paper that contains only the disclosure, the date on which the disclosure form is sent or provided, the name, address, and telephone number of the residential mortgage originator, the name and address of the prospective borrower, and, at the option of the residential mortgage originator, the prospective borrower's dated and signed acknowledgment of receipt of the disclosure form. The provisions of the disclosure form, other than the disclosure in this subdivision, are not required to be in at least 16-point capitalized boldface type. The prospective borrower shall be permitted to keep a copy of each written disclosure form. When a prospective borrower asks a residential mortgage originator for information about a prepayment penalty, the residential mortgage originator shall give the prospective borrower the requested information, and shall tell the borrower the highest aggregate amount of the prepayment penalties, fees, premiums, and other charges that the residential mortgage originator would charge to the prospective borrower for prepayment of the residential mortgage loan one year after it is funded, based on a hypothetical unpaid principal balance of $100,000 and also based on the highest interest rate that the residential mortgage originator would charge to the prospective borrower. A mortgage originator responding to requests for residential mortgage loans via the Internet may make the disclosure in a manner acceptable to the commissioner.

© A residential mortgage originator shall not enter into a subprime loan that contains a provision requiring or permitting the imposition of a penalty, fee, premium, or other charge in the event the residential mortgage loan is prepaid in whole or in part. This prohibition does not apply to any loan with a principal amount that, or, in the case of an open-end credit plan, in which the borrower's initial maximum credit limit, exceeds the conforming loan size limit for a single-family dwelling as established from time to time by Fannie Mae.

Subd. 3.Application.This section applies to residential mortgage originators located in this state and residential mortgage originators located outside this state.

[BobT]

I don't know what the deal was. I searched for bi-weekly calculator again and tried a couple more and my results were quite different. I stand corrected! The savings on a $100K 30-yr mortgage using a bi-weekly payment plan is significant to the tune of about $27K. The results were not identical even though I submitted the same loan configurations but they were within a few dollars.

Can I claim senility?

[Tom7227]

You can claim senility if you want but in my book none of the answers have been correct with the precision you seem to desire.

The claimed answer is $"X" of savings. The defect is that none of you have taken into account the income tax implications of the accelerated payments. Adding that factor makes it very difficult to come up with an answer since you need to project your income over the years of the mortgage, be able to know the applicable tax rates and then make the calculation.

I have not done so but I suspect that part of the imaginary 'savings' is going to end up going to income tax since you will lose the mortgage interest deduction. Presumably your income will go up and so the value of that deduction would likely increase as you move up into a higher tax bracket.

I posted the statute which seems to say that a bank cannot penalize you in any way for making an accelerted payment. I need to point out that the banking laws are complex and the variations on what is a 'bank' are numerous. Therefore I can't say with certainty that the 'no penalty' provision applies to every mortgage out there. I will suggest that anyone who has a problem contact the Commissioner of Commerce and see if you can get an answer specific to your lending institution.

I found out the hard way that problems can jump up. I pay my mortgage on line and found out that if I add something to the payment my bank puts the extra into the insurance and tax escrow rather than apply it against the loan principal. If I send them a check with one of their forms I can specifiy where the extra money goes to.

[CJH]

You definitely make a good point and everybody should take the tax deduction into consideration. There is no absolute rule, everybody must evaluate their own situation and go from there.

That being said, 9/10 times the savings on compound interest exceeds the savings on a mortgage tax deduction. A deduction is just that, part of a larger equation, not a rebate.

As stated with the 100k example I posted earlier, for the majority of people, the $30k savings in interest will far outweigh the tax savings over the last years of the loan that have been eliminated. Plus those savings could then be invested or put into an interest bearing account to earn even more. Another thing to consider is that if you are holding onto a mortgage just for the deduction, you are betting that the tax code won't change, and we all know that's a gamble.

[BobT]

The thing about the tax deduction is that we often get caught up in it too much. The truth is for every dollar you spend on interest, the most you can possibly gain from the tax deduction is $0.00. That's because interest is an expense paid into someone else's pocket. The tax deduction is just a way to reduce how much you pay into that person's pocket by routing it back through your tax burden. In other words, you pay Joe Banker $1.00 and Uncle Sam gives you a rebate for part of it. The biggest rebate you can possibly get on that dollar is $0.35 but that's if your annual taxable income is more than approximately $373,000.00. For most of us the federal tax rate is probably more in the 25% - 28% range. State tax rates are about 1/2 that amount give or take.

I would bet that the savings in interest plus taxes on a bi-weekly mortgage will outweigh anything Uncle Sam offers in the form of a tax deduction and probably by quite a bit over the term of the mortgage.

[jwhjr]

I'd rather have it paid off than worry about the tax deduction. What I pay in P&I each month x 12 is far more than what I'd end up paying in taxes without the deduction. Less than 8.5 yrs to go...

[Tom7227]

I agree that paying the mortgage down results in more savings than the dollars you'd save via the mortgage tax deduction. I just wanted to point out that whatever number you think you've saved with advanced payments has to take the interest deduction into account.

[fisherdog19]

Paying biweekly will in essence have you pay an extra mortgage paymet per year. 52 weeks in a year, 26 payments, or 13 1 month payments. The extra money should go towards paying down your principal balance and pay your loan off earlier than the amortization schedule. You should not have to sign up for it, just set up an auto pay with your checking account for a payment to go out every two weeks. Making larger than your required payments will do the same thing, the more you pay extra, the quicker you'll pay your mortgage off. You should not worry about a prepayment penalty, those type loans typically had a max 3 year PPP and haven't been available for about that long; they are also illegal in most states.

Any questions or need a calculation of how early extra payments will pay off your loan just email me. Refinancing into a shorter term AND keeping your payments the same or less is also possible. Rates are rediculously low, low 4% range for 30 year high 3% on the 15 year. I have 10, 15, 20, 25, and 30 year fixed programs available.

[delcecchi]

If you give the financial institution less money that is a win for you. Unless you have a much higher income than most you are probably in the 25% bracket (maybe 28 if you are single and have a good job). State is another 7 percent. Total is like 30 percent (since fed tax is taken into account on state and vise versa) So if you save 30K, the government gets 10 and you get 20.

On the other hand, if you save and invest the money you can safely make about what the interest cost is and you now have the money for emergency or other use without refinancing the house.

Since interest rates are so low, it might not be a good idea to pay it off fast. Might look pretty good when rates go back up.