Every month I write a check to my mortgage company for $840.52. And, I will continue writing that check for almost thirty more years, if I live that long. So, I was very interested to hear that I could take that same payment (for a small additional monthly fee and one larger set-up charge) and cut $1,000s and years off my mortgage. Something sounded too good to be true.
They called it a bi-weekly mortgage. When I checked out a bi-weekly mortgage calculator on the web, it sure enough was going to save me large sums of money. Then I noticed that I wasn't making 12 months of payments, but 13. You know, 52 divided by 2 does not equal 24, but 26. That fifth week we get in a month once a quarter adds up to a whole month by the end of the year. So, of course, I'll save money by the suitcase full. That's because I'm putting a whole extra payment a year in it.
What I learned, I'll share with you:
Beware; bi-weekly mortgages are not what they seem. That poor mortgage calculator can only do so much. It can provide the figures for you to decide whether or not bi-weekly mortgages are something you want to explore, but it can't verify the company said mortgage. A mortgage calculator is only good for the figures, for the contractual terms you must read the small print yourself.
Some companies offer bi-weekly mortgages. What they do is take your monthly mortgage payment, split it in two and take two equal payments electronically from your account each month. (Sound familiar?) The savings your mortgage calculator said you would make with a bi-weekly mortgage becomes void with this kind of mortgage. You see, you still, in effect, make 12 payments during the year, plus the lender charges for extra payment handling.
Crunching the numbers for this is regular calculator, not mortgage calculator, work. Even if it was a true bi-weekly, if they charge an additional setup and other monthly fees, it may not be worth it.
One way of avoiding this is to just pay the mortgage monthly, and prepay an additional month at the beginning of each year. This time a mortgage calculator can show you the difference this will make to your overall mortgage.
Alternatively, use a mortgage calculator to figure how much per month extra you need to pay in order to make up the same savings as making one full additional payment annually. This could be as simple as dividing your monthly payment by 12 and adding that much to your mortgage each month.
Either way, be sure it gets credited to your principal, not as an advance payment of regular payment. Reducing the principal reduces the length of your mortgage, which reduces the amount you owe. Applying it to your regular payment just pushes your due date into the future with no savings at all.
For example: Take my mortgage payment and divide by 12: $70.04. Add it to my regular mortgage payment for a total of $910.56. Then start with the mortgage calculator to check on the savings. Whoo, it cut eight years of payment off my note, saving me $80,689.92. Now where can I find another $70 a month?
All done without any set up charges or additional "administrative fees" or electronic transfers. Bless my little mortgage calculator's heart.
One big advantage of this method is that you can increase the monthly additional payments when you need to. Or, drop them completely if your circumstances change; you are only committed to paying the original monthly payment. Check it out with a mortgage calculator. We call this fun math!