Answers to bi-weekly loan payments.

From: JT144@aol.com
Subject: Answers to bi-weekly loan payments.
Date: Sun, 6 Dec 1998 18:52:39 EST
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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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