Monday, August 11, 2008

Let' S Say An$ 180, 000 Mortgage

Someone told me he was saving lots of money because he switched his mortgage payment schedule to biweekly.



Several years ahead of his monthly payment schedule and that it would save him over$ 70, 000! He said it was a really great plan and that his mortgage would be paid, in full. I told him I thought it was a great deal and then asked him how much it cost to convert to the biweekly plan. I didn' t want to go into this more deeply, so, I just smiled, said" so long" and moved on. He said, "Nothing! " and then proudly stated, "and there is only a$ 19 charge added on to each payment! " Ouch! Here's the problem.


I figure he has 28 years left on his mortgage. Since I know his house is almost brand new. The$ 19 charge he's paying every month to covert to the biweekly plan is costing him: 26( payments per year) , times 28( years left to pay) , times$ 19( per payment) . Most lenders, especially the high profile ones, don' t charge this much for a biweekly mortgage conversion. This adds up to a total cost of$ 13, 832 for something he could have done for free! More commonly, there is an upfront charge of anywhere from$ 800 to$ 1, 30Often times these high profile lenders do the biweekly conversion in conjunction with a refinance.


If you pay 2 points for a$ 200, for instance, 000 refinance, the cost is$ 4, 00 With a refinance, usually you would be taking cash out of your equity, so if you don' t need to do this and your new biweekly mortgage would have the same interest rate as your old mortgage, as you will see later, you would just be wasting money. When you go the refinance to a biweekly plan route, you usually only pay points and not a conversion fee per se, even though the payment plan you end up will be a biweekly one. The instance where this type of refinance to a biweekly plan would work is in a situation where you did want to take cash out of your equity and you were changing from a high interest rate mortgage, like 9% to a nice low one, like 5% . Let's see how good of a deal this would be. That would change everything. You are paying off. The interest rate is 9% and the full term of the mortgage is 30 years.


Let's say an$ 180, 000 mortgage. On this mortgage the total interest and principal payment due is$ 1, 4432 each month. Here, your new monthly cost is$ 1, 0764 monthly or$ 5382, which is half the monthly payment, paid every 2 weeks or, biweekly. Now, you are able to refinance to a$ 200, 000 mortgage at 5% . If you' ve paid your old mortgage for 6 years you would have paid about$ 10, 000 off of that mortgage. So, the refinance puts$ 30, 000, minus the 2- point charge, in your pocket as well as lowering your monthly payment by$ 375 a month. This means your old principle was$ 170, 000( $180, 000- $10, 000) .


Not bad even if you are paying$ 4, 000 in points. But what about the fact you' ve got to pay a mortgage for an extra 6 years? Yeah! Well, here's where they will try to sell you the biweekly plan. However, what they are not so upfront about is that with a biweekly mortgage plan, you pay more toward your principle each month. If you pay$ 5382 biweekly instead of$ 1, 0764 monthly, the mortgage will be paid in 25 years and 3 months, not too much longer than 24 years. There are 26 two- week periods in a year.


This works out to the same as paying 1 and 1/ 12th payments each month. So, 26 biweekly payments equal 13 yearly payments. Of course, paying this extra fraction of a payment every month, is the real secret to how biweekly plans work. If you pay 1/ 12th of a monthly payment extra every month, you will pay off your mortgage in the same number of payments it would take to pay off the mortgage with the biweekly plan. The plain and simple fact is. The refinance, would still be, itself a propitious move but, personally, I' d opt for the monthly plan if I were doing it. I still could pay extra each month and pay this mortgage in 25 years, or a lot sooner if I chose to.


I' d rather be liable for as low a monthly payment as possible. However, maybe a few years down the road interest rates would be high. So don' t be caught off guard if approached by a salesperson who is intent upon converting your mortgage to a biweekly plan. If so, I' d be making more money by taking the extra money that would have been going toward the biweekly payment plan and putting it in a savings account, a hot Mutual, or better yet Fund. While a refinance can be beneficial in many circumstances, a biweekly plan never is because you can just as easily make larger than required payments without one.

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