Go to Jeff Salisbury LWGate Home Page.From: JT144@aol.com
Subject: Answers to bi-weekly loan payments.
Date: Sun, 6 Dec 1998 18:52:39 EST
Next Article (by Subject): bi weekly mortgage payment "J.D. Baldwin"
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In a message dated 12/6/98 8:21:13 AM Eastern Standard Time, owner-persfin- digest@lists.xmission.com writes: << On Thu, 3 Dec 1998, Mark Nowak wrote: > I've recently been told (and it should have been obvious) > that if you pay your mortgage off in a biweekly manner > instead of with monthly payments, you can save yourself > a significant amount of interest. Since my paychecks > do me little good in my checking account, when I buy > a house I'd like to be able to pay back the loan in > biweekly payments. >> You will find few lenders who offer bi-weekly loans. The ones who do often use bi-weeklies to distinguish themselves in the market place. They also get a portflio of loans without delinquent payments and an increase in their checking account business. Most banks require automatic payment transfers from (their) checking accounts for the bi-weekly payments. There is much confusion about bi-weekly loans. Many "scams" abound and thrive on the mis-understandings. What must be understood first is the effect of different compounding periods. Below is an excerpt from an electronic book I've included with a prepayment program I wrote. >> >>The first thing that must be understood is the impact different compounding periods have on a loan. Loans have payments that must be made and the time between is the compounding period during which interest accrues. The loans that we have examined so far are based upon a monthly compounding period. Below is a table comparing our example mortgage at various payment intervals. ____________________________________________________________________________ Principal 90,000.00 Interest 10.00% Term 30 Periodic Annual Difference Total Difference Payment Cost From Annual Cost From Total Cost Annual Cost Annually $9,547.14 $9,547.14 $286,412.94 Quarterly $2,372.57 $9,490.28 $56.86 $284,702.06 $1,710.88 Monthly $789.82 $9,477.84 $69.30 $284,322.57 $2,090.37 Biweekly $364.41 $9,474.66 $72.48 $284,195.44 $2,217.50 ____________________________________________________________________________ A biweekly mortgage loan saves $2,217.50 off the total cost of an annual mortgage, but only $127.13 off the total cost of a monthly mortgage. The shorter compounding period of a biweekly note does save a very small amount of money over a monthly compounding mortgage, but nothing to get excited about. Copyright (C) 1997, Financial Solutions.<< << The bi-weekly compouding only saves $127.13 over the total cost of a monthly loan. A whoping 0.04%. The reason bi-weeklies SEEM so sensational is the way the loan payment is calculated and presented. Most banks will take the *monthly* payment and divide it by two. This forces you to make 26 "half" payments or 13 "full" payments per year. This will shorten your loan and save you money. However, you can duplicate very closely the same results by making prepayments of principle. A comparison of biweeklies with a prepayment plan should be made. Prepaying 1/12 of your normal monthly payment each month will come very close to duplicating a TRUE bi-weekly loan. However, most "scams" that offer to turn your loan into a bi-weekly for a fee are not true bi-weeklies. They take your payments and at the end of each year pay any excess in an escrow account as a prepayment. Your loan amortization remains monthly. These plans often cost $350.00 up front and also charge a small fee for each payment transfered to their escrow account (26 per year for about 22 years). The promoter gets 300.00 of the fee. The escrow company gets 50.00 to set up the account and then 1.50 to 2.50 for each transfer. The escrow company may or may not credit you with interest earned on your mony in the account. The out of pocket costs rise to over 1200.00 over the life of the loan. Since they make a prepayment at the end of each year, not as much interest is saved then if you prepaid monthly. The lost interest plus your out of pocket costs can approach 8,000.00 to 10,000.00. You actually forfeit almost 10k by buying into a bi-weekly escrow plan. In summary, don't get too excited about bi-weeklies. Prepay your loan instead and save that extra money yourself. You can calculate to the penny what any prepayment can save you. Comments/inquires can be directed to winaudit@aol.com. - -
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