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Paying Your Mortgage Biweekly

Posted By Jim On 11/30/2006 @ 10:05 am In Debt,Personal Finance,The Home | 23 Comments

One of my friends recently purchased a home and she was sent a letter (if you recently purchased a home, you’ll probably be familiar with how many letters you will get informing you of great refinancing rates) about a program that would speed up her mortgage payments by sending them in every two weeks instead of just at the end of the month. She was primarily wondering whether it was a scam and whether it “worked” because I suppose the letter, which always looks shady, probably did a poor job of explaining why it would pay off her mortgage faster.

The biweekly mortgage payment strategy is one that’s been in existence for quite some time. It is legitimate and there are two reasons why it’s legitimate:

  • More Payments – Let’s say your mortgage is $1000 a month. When you make one payment a month, you pay a total of $12,000 each year towards your mortgage. When you make two payments a month, you’re now talking about twenty six (26) payments (fifty two weeks divided by two) of $500 which is equal to $13,000 a year – or $1,000 extra. Clearly, if your budget can handle it, this will pay your mortgage off faster simply because you’re paying more.
  • Less Interest – When you pay the standard once a month, interest accrues on your balance for that entire month. When you pay twice a week, a greater percentage of your payment is applied towards the balance and you speed up where you are on your amortization schedule. The principal, in theory, has less time to accrue interest.

So, now that you’re convinced this is a legitimate way to speed up the rate at which you’re paying down your mortgage, let me give you the advice I gave my friend if you’re thinking about getting one of these “services.” Don’t. You don’t need to pay some fancy expensive company for this service, you can usually talk to your lender and they can set something up for you. If they are unwilling and you have no prepayment penalties, just send in the payments yourself. With online banking, it’s easy to schedule regular payments automatically so you won’t even have to buy any more stamps.

So… does anyone know why companies were sending me letters asking me to refinance a month after I just got a mortgage? And why would they ever think I’d accept their offer?

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