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Valued Contributor
JM-AM
Posts: 3,303
Registered: ‎06-09-2010

Re: Strategies for 13 payments in 12 months

Prepayment penalties on fixed rates are pretty much non existent. Obviously you need to check the paperwork and ask questions, but I have not closed a loan in the last several years that had a prepayment penalty on a fixed loan. For the sake of comparing I probably closed 130 loans in last few years with no prepayment penalties.
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Valued Contributor
MovingForward_2012
Posts: 3,406
Registered: ‎12-19-2012

Re: Strategies for 13 payments in 12 months

Yes that is a good point you mention about the possible prepayment penalty. On my mortgage docs, it states that my 30 yr fixed mortgage doesn't have a prepayment penalty. So I am happy about that but I do plan to call them before I change my payment to biweekly.
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Established Contributor
jadeite788
Posts: 510
Registered: ‎09-25-2009

Re: Strategies for 13 payments in 12 months

I agree, that is why there is some enticing the 15 year option.  Which is not bad if you can afford it.


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Valued Contributor
JM-AM
Posts: 3,303
Registered: ‎06-09-2010

Re: Strategies for 13 payments in 12 months

Good Idea MovingFoward.. Here is why...

 

If you decide to partake in Bi-Weekly payments on your own by deviding your payment in 2, most lenders will either apply to principal only and or interest only. Your payments would not be calculated properly and if you havent contacted them to make arrangements, then you have the chance of being late on your mortgage payment.

 

Many Lenders offer Bi-Weekly payments, and can actually be agreed upon when originally being approved for your home purchase. Most usually do charge a small minimal fee to set up Bi-Weekly payments.

 

Bi-Weekly payments have the possibility of saving thousands of dollars and knocking off about 5-10 years off your mortgage payment.

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Valued Contributor
MovingForward_2012
Posts: 3,406
Registered: ‎12-19-2012

Re: Strategies for 13 payments in 12 months

Thanks for the info JM-AM. I will certainly follow your advice. It seems that biweekly payments might be a little easier to manage financially, especially if the mortgage payment is a significant chunk of take home pay due to a larger back end ratio. I will run some budget tests with it to see if it is something that I should strongly consider doing. I love the sound of 5-10 years less in mortgage payments! :-)
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Regular Contributor
bobebob
Posts: 244
Registered: ‎08-14-2011

Re: Strategies for 13 payments in 12 months


MovingForward_2012 wrote:
Thanks for the info JM-AM. I will certainly follow your advice. It seems that biweekly payments might be a little easier to manage financially, especially if the mortgage payment is a significant chunk of take home pay due to a larger back end ratio. I will run some budget tests with it to see if it is something that I should strongly consider doing. I love the sound of 5-10 years less in mortgage payments! :-)

Paying extra fees for a biweekly mortgage is a waste of money

 

I wouldn't get hung up on biweekly payments, and here's some reasons why:

 

1. Biweekly payment setups are done more to align your mortgage payment with your paycheck.  In your case you stated you get paid twice a month versus every two weeks, so there is no benefit of being able to sychronize your mortgage payment with your paycheck.

 

2. Even if you were getting paid every two weeks (as I do) it is not a big deal to normalize your budget to just figure out how much of your paycheck needs to be deposited into a budget checking account (the remainder going to a personal account) to make sure that whenever the bills must be paid that there is sufficient money in the account.  I get paid every two weeks but my mortgage and most of my other bills are monthly.  It's not a problem if you have a basic budget.  I think most people on this site probably already do a budget already.

 

3. While I agree that setting up a 26 payments per year mortgage and paying it at 1/2 of the payment amount of a monthly will save you $$ over the life of the loan, this is because you are paying ahead on principal.  However, this is just one way of making extra payments against your principal. 

 

Unless you got suckered into some loan with a pre-payment penalty, you can make extra payments whenever you want.

 

I ran the numbers for the 15 year loan I am currently re-financing right now.  $152,000 for a 15year fixed rate at 2.875%:smileyvery-happy::

 

If I set it up for bimonthly and paid at 1/2 the monthly amount, my total paid interest for the loan would be $31,676

If I paid the normal monthly amount and added the extra payment divided up by 12 instead of 26, the interest is $31,775

 

Yup, that is a difference of only $100!  And both loans would get paid off in the exact same month (13.5 years into the 15 year loan).

 

The $100 difference is due to the fact that the very first biweekly payment is made a couple of weeks earlier than the first monthly payment.

 

Don't limit yourself to paying an arbitrary amount of extra principal

 

For me, it is much more important to figure out how much extra you can comfortably afford to pay on your mortgage and just pay this along with the normal payment each month.  Maybe one extra payment a year is the right number for you, but I think it's much more likely that you could pay more comfortably.  And maybe one extra payment a year is too much. Pick what works for you.

 

I allocate a total of $1500 towards my mortgage and escrow monthly .  Currently this equates to an extra $280/month towards principal.  My loan will get paid off two years and four months earlier that a "standard"  biweekly arrangement. And my total interest will be about $6,500 less than either "1 extra payment" method.

 

Keep in mind also that the biweekly arrangement is an added hassle for your bank or whomever set up the biweekly.  This means that you will be paying additional fees to someone for this service.  I am willing to bet that 13.5 years worth of fees is going to more than compensate for that initial $100 savings on the biweekly in my example.

 

So take the time to set up a proper budget and there is no reason to pay someone extra fees to set up a biweekly. 

 

Any fees you pay for a biweekly would be better spent applied to the principal on your loan!

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Senior Contributor
StartingOver10
Posts: 3,713
Registered: ‎03-06-2010

Re: Strategies for 13 payments in 12 months

^^^ Well said bobebob. In the end, as I said earlier, it is the plan you stick with for the long term that makes the difference. I do agree however, paying set up fees to pay down your mortgage earlier is a waste of $$$.

Established Contributor
jadeite788
Posts: 510
Registered: ‎09-25-2009

Re: Strategies for 13 payments in 12 months

 

well to sum it up that is what I had initially stated that one would be paying against the principal.  But it depends on how much the mortgage is and how much one can afford.  Someones mortgage can be 500 a month, and if they giving them $375 biweekly, they are cutting a huge chunk out of there principal on the mortgage.  It just depends on the lender, and the terms of the agreement in regards to paying more , along with the amount of mortgage.  If one is living beyond their means, yeah it might not make a difference. 

But for someone who is frugal, it could mean the difference  of owning a home free and clear in 10-15 years versus 30 years.  Just my two cents.


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Valued Contributor
MovingForward_2012
Posts: 3,406
Registered: ‎12-19-2012

Re: Strategies for 13 payments in 12 months

Thanks for the insight, I will do some more comparing and contrasting. I have had a mental budget for over 7 years now. For me, it works better than a spreadsheet because I get too tempted to squeeze extra out of it...and I have gotten burned a few times when Mr. Quicken said, "You are good for 6 months!" LOL! Mr. Quicken liked to talk to my husband too and we would get into fights over what Mr. Quicken said. Having a brain budget has resulted in my conservative thinking going into action and has helped me save so much money over these few years.

Regardless of how I pay, I had planned on opening another savings account and auto transferring 1/4 of the mortgage payment into there each week on top of some "cushion" that I preload in there in the beginning. This will force us to spread out our spending evenly, rather than, concentrate it at the time of month when most bills are paid and another paycheck has come in. I think this method will keep my brain from exploding! Haha! :-)
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