Refinance 101:

Bi-Weekly Payments?

• Examining the benefits of refinancing
• Buying a home
• Understanding your credit
• Bi-Weekly payments?
• Additional Resources

Save Tens of Thousands of Dollars But Avoid the Scams

You’ve heard over and over: bi-weekly mortgage payments will save you tens of thousands of dollars over the life of your mortgage and enable you to pay it off nearly eight years early at a savings of up to 30% in interest costs.

This is true, however beware! There are so many different versions of the bi-weekly plans, yet not all of them will save money. Actually, some of them simply rip you off. Here's some valuable information for those considering a bi-weekly plan.

The Savings Facts

Fact: on a $100,000 30-year mortgage at 6.5%, you'll pay $127,544 in interest, plus the $100,000 principal, for a total of $227,544. Paying one-half of your regular monthly mortgage every two weeks will result in interest of $97,215, a savings of $30,329. You'd have to earn over $42,000 before taxes to net that much money.

Fact: The larger your mortgage, the greater the savings. On a $200,000 mortgage, you'll pay $255,088 in interest, plus the $200,000 principal, for a total of $455,088. Paying one-half your regular monthly mortgage amount every two weeks will result in interest of $194,430, a savings of $60,658. You'd have to earn at least $85,000 before taxes to net that much money.

Fact: Most mortgages do not have a penalty for prepayment.  Many mortgage programs found in the secondary market, where many with compromised credit turn, do have heave prepayment penalties.  It is important to check with your lender.

Fact: All it takes is discipline to take advantage of the savings from prepayment of your mortgage, not a special lending program.

What To Look For

It is a must have to find a lender that will immediately credit each ½ monthly payment when the receive it.  If the lender waits to credit your payment until the second payment, you won’t ever see the benefits of the ½ pay system.

Several companies will offer to "convert" your mortgage to a bi-weekly mortgage payment plan for a substantial fee. While they'll automatically withdraw the payments from your bank account every two weeks, they only pay your lender once a month. In effect, the additional payment won’t be applied to your loan until the year’s end. The end result is that the lender benefits from the use of your money, while you pay him a hefty fee to earn interest on your money.

Beware of the bi-monthly mortgage, which is not the same as the bi-weekly mortgage and does NOT achieve the same results. With a bi-monthly mortgage, you pay one-half your monthly mortgage twice a month as opposed to every two weeks, so you don't make an extra payment over the course of a year. You save only one month's interest on a 30-year mortgage instead of seven year's interest!

What You Need To Do

• Check with your lender or read the fine print of your mortgage document to make sure there's no penalty for pre-payment.
• Ask your lender how they'll treat your bi-weekly payments (apply each payment immediately to the principal or wait for the second half of the payment to arrive?).
• Whenever you include additional money in your payment, make sure you include a note that it is to be applied to the principal, not to the next month's payment.
• Check on your lender to make sure the extra payments are being applied to your principal. If you're making bi-weekly payments, it's easy to tell what your principal balance should be; just plug your mortgage amount and interest rate into our Bi-Weekly Mortgage Payment Calculator.

Other Options For Saving Big Bucks On Your Mortgage

You can achieve the same benefits of a bi-weekly mortgage by making your monthly mortgage payments as usual, but making one additional payment each year. The difficulty with this method is that you have to come up with a large lump sum at one time.

Another method is to pay an extra 1/12th of your monthly payment each month. If your payment is $1000, pay $1083 each month ($1000 divided by 12 = $83). After 12 months, you'll have made the equivalent of an extra month's payment.

Coming Up With the Money For the Extra Payment

There are ways to come up with the money to make an extra payment a year, including:

• Use your income tax refund.
• If you receive a bonus at work, apply it to the principal on your mortgage.
• Pay an extra $25 or $50 or $75, or as much as you can afford each month when you pay your mortgage.

Using one of these methods to pre-pay your mortgage is probably the best opportunity you'll ever have to save tens of thousands of dollars so easily.

The Bottom Line

You shouldn't have to pay to convert your mortgage to a bi-weekly structure. Be committed and find the discipline necessary to pay additional principal on your mortgage equivalent to at least one full mortgage payment a year, whether you do so in bi-weekly or monthly increments or all at once at the end of the year.

Remember, you shouldn't need to pay any fees to achieve the benefits of the bi-monthly mortgage on your own, as long as you have the discipline to stick with it.