Reader Questions: Biweekly mortgage payments and cutting years off of my loan

bisaverAs my site expands and my readership grows, I will try and answer more specific questions for my readers and create a FAQ section on the site for readers to thumb through if interested. Please, submit your questions to me as well, I will answer them as quick as possible.

Today’s question comes from a friend and a reader Ryan K:

“My mortgage company called me and asked me if I would be interested in signing up for a biweekly mortgage payment plan, they’re telling me I can save thousands in interest and cut years off the life of my loan – what’s the deal, is this something I should look into further?”

First off, Ryan (and my other readers), be wary of any products being “offered” by your mortgage broker that claim to save you thousands of dollars. Quite often, you can accomplish the same thing by simply calling your bank and asking them. In doing this, you can avoid unnecessary fees and other charges that would go right to the mortgage broker for something offered free by your bank. Also, as the old mantra goes “If it sounds too good to be true, it probably is.”

To answer the question though, what they’re telling you with regards to saving money and cutting years off of the life of your loan is quite misleading. They want to make you think that you’re payments will be the same in total and that the frequency of your payments will create savings and lower the life of the loan and associated interest charges. It’s just not true.

Let’s use an example of a mortgage payment of $1000 due every month. If paid as usual, you would pay $12,000 at the end of the year. In going to a bi-weekly payment plan (making a payment every two weeks) rather than making 12 payments per year of $1000, you will be making 26 payments of $500. You will pay off the loan faster because you’re paying more on your loan each year. Instead of having paid $12,000, you will have paid $13,000 at the end of the year.

There’s no question you can save money in the form of interest charges as well as increase your taxable deductions, but you will have to come up with the additional $1,000 per year in mortgage payments to do so.

You can accomplish the same task for free by sending your mortgage payment along with an additional payment to be applied towards principal (make sure your lender allows this, and that you don’t have prepayment penalties).

I caution you to make certain you can make the additional payments if you decide to move to a biweekly payment plan, as you will pay more throughout the year. If you can do it, yes, it’s great. But you’re not saving money by paying more frequently, rather by paying more on the loan period.

What’s your question?

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