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How to pay biweekly mortgage the right way…

December 13, 2010

This blog post came from MSN’s new Real Estate Initiative–   The blog has some great posts such as the one below- There is no RSS feed so Ill check it regularly and re-post some of the articles I feel are most relevant to our readers.

 

How to pay biweekly mortgage the right way

Although most lenders charge borrowers to join one of these interest-saving payment plans, there are plenty of other ways you can make a biweekly payment without paying added fees.

Posted by Mai Ling at MSN Real Estate on Friday, December 3, 2010 10:46 AM

Paying off your mortgage biweekly rather than monthly can save you thousands of dollars in interest. (© Diane Macdonald/Getty Images)I first heard about biweekly mortgage payment plans when I became a homeowner, and although it sounded like a brilliant way to save, it seemed as if I had more than enough on my plate as a new homeowner than to try to figure out how to join such a plan.

As a personal finance column from the Los Angeles Times explains, paying off your mortgage biweekly rather than monthly can shave years off the life of your loan and save you thousands of dollars in interest — just because of the one extra mortgage payment you make each year.

However, it sounds like I wasn’t the only one who was wary of these payment plans, since it turns out that signing up for such a plan through your lender might not be the most cost-effective way to make those payments. (Bing: Looking for a lender?)

L.A. Times columnist Kathy Kristof says most lenders charge customers to join these payment plans, and although the charges don’t cancel out your savings, they still sort of defeat the whole purpose of making the biweekly payments in the first place, which is to save money. She provides this example:

A consumer with a $200,000, 30-year mortgage at 5%, for example, could pay off this loan five years faster and save $33,000 in interest by paying biweekly, said Diana Rodriguez, a spokeswoman for Wells Fargo Bank.

 

However, if that same homeowner joined a payment plan through a lender such as Citibank, he’d pay $375 just to join — then $1.50 for each “transaction,” which would amount to $39 a year — costing you a total of $1,350 after 25 years, Kristof explains. (Wells Fargo’s plan is free, she notes.)

You still save more than $30,000, but wouldn’t you rather save that $1,350, too?

Well, according to Kristof, you can easily save that money through myriad other avenues to make that biweekly payment that don’t involve joining a plan through your lender:

Set up your own automatic payments

Although mortgage lenders don’t usually charge you to make more than one payment a month, Kristof says it’s best to check first to make sure you and your bank are on the same page. “Some might deduct the midmonth payment from principal, and then still expect the full payment on the first,” she writes.

Simply make one extra payment each year

Making one full extra payment might not be as painless as the biweekly plan, which you might not even notice, since the extra two half-payments are made gradually through the year. But having the option to make the extra payment also offers you the flexibility to make that payment when you have a bit more money on hand.

Pay extra each month

There are two different ways you can do this: You can simply pay an additional amount each month that you can easily afford, maybe rounding up to the next $100; or pay for a full mortgage payment through the duration of the year by dividing it by 12, and paying that amount each month. Kristof explains:

If you had that $200,000 loan at 5%, for example, your normal monthly payment would amount to $1,073.64. Divide that by 12 and you get about $89.50. Add that to your normal payment and you’d be sending in roughly $1,163 a month.

 

No more dragging my feet on this one. It’s time to start saving!

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