We were going to do it with our previous lender, and I was told by a friend, who is a mortgage broker, that it is not a good idea. I didn't understand his explanation, so when we refinanced, and my cousin handled it, I got him to explain it in detail.
First let me say that we still talked about doing it, but it wouldn't be logical for us. Our lender requires a hefty amount to enroll in the program, and they charge a $50 fee with each payment in order to process the extra payments. None of that goes anywhere but in their pockets. Also, they require that we allow them access to our bank account--we cannot make the payments--they draw them when they please. We were uncomfortable giving that much access to our lender, especially since they told us that there are periodic fluctuations when they re-evaluate our escrow fund, and they might be drawing different amounts at different times. We can give the bank permission for them to draw whatever they want, or we can give the bank permission for them to only access a set amount, so there are no errors or double withdrawals, but there's no way to set it up safely if they want to draw varying amounts from time to time.
My cousin told me why it's an idea which looks great on paper, and may work with the right lender, but why they encourage people to not do it. First of all there are usually fees involved, such as I described above, and those fees rarely do anything but line someone else's pockets. Secondly, that ';extra'; money gets logged at the end of the year, so it doesn't help you out over the course of the year, and if there is something amiss with your escrow, the ';extra'; amount may all go into fixing the problem with escrow, rather than to the bottom line. Third, companies mess up on those bi-weekly payments all the time. Most people stick with the regular once-a-month payment, and there are often errors with bi-weekly payments which can take a lot of time and sometimes money to fix. Finally, that ';extra'; payment includes interest and taxes, so you aren't really paying down the principal by a significant amount.
Here's what they recommend instead. (And this is from both my cousin and the person who first told me about it when I didn't understand it in detail.)
Take one of your payments, and divide it by 12. Then, take that amount, and add it to your monthly payment every month. Before you do so, contact your lender and tell them you will be adding an extra bit to your payment each month, and that you want it applied to the principal. (Applying it to escrow is usually the default, so that part's important if the money is going to do you any good.) Then simply make your regular payments, plus 1/12 of a payment to go to principal.
That system has the advantage in that it really does give you an extra payment each year, but that extra payment is all principal, and not interest or escrow for taxes. That knocks down your principal faster, and builds equity faster, because every extra penny you pay is going where you want it to go. You'd still pay approximately the same amount if you did bi-weekly payments, but not all of the extra will go to principal. If you add to your payments, you can dictate where that money goes and make it go where it counts.
My cousin had one other tip for me. He said instead of making your payment on the same day of the month, make it every four weeks. (That works out especially well if someone is getting a paycheck bi-weekly.) What happens is that in the course of a year, your payment gradually moves to earlier and earlier in the month, and finally starts going in the month before it's due. If you allow that to continue, without adjusting things, you end up making extra payments anyway, and that helps even more. The extra payments you make are not pure principal, but they do help things along, especially since you're already adding the extra principal into each payment already.
Make sense? I hope so, because I cannot explain it any better.
Good luck with whatever you decide.Mortgagees, have you tried the bi-weekly mortgage payment program and if so, has it worked out for you?
Thanks alot for advice.Been trying to decide to go bi-weekly on my mortgage ,advice was great and will explain to my freind about it also that also wanted to go bi-weekly .
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If you select this as a plan you will be obligated to continue with this plan until you refinance or sell your home.
I would suggest that you add an additional payment every three months. This might work as it is volunteer, if you sometimes don't have the extra payment then you are not required to make the extra payments.
You might also add an additional amount each month. Make sure you make an extra check marked add to principal only on the check. You will have to determine what this amount is to be paid each month. Divide your monthly payments by 12 this is one method you can use.
These methods will reduce your mortgage loan. The amount you add each month, quarterly or annually will determine how many years you would reduce your mortgage by.
Then most mortgage contracts will only allow you to pay a certain percentage over amount due each month or year, so check your loan documents that you signed at closing to make sure you stay under that percentage.
I hope this has been of some use to you, good luck.
';FIGHT ON';
Your mortgage company may not actually apply the extra payments until the end of the year, negating some of the alleged savings. If your mtg allows it, just send some extra money towards principal each month - I've been doing that for my entire mtg- 2.5 yrs - it's only an extra $20-40 a month, but when the early Mtg payments only apply $10 a month towards principal, that little extra dds up - I haven't calculated it lately, but I know I've probably knocked at least 2 payments off the mortgage. I'll be able to increase the extra pmt in future years, once I get a few other things paid down more
We thought about it. But with our plan we have to give them an enrollment payment that doesn't go towards our house. So we just decided to do one extra payment a year. Then we decided on dividing up that one extra payment over 12 months. So we pay about a 150 dollars extra a month to do that. We have been doing this for about 2 years and we can see a noticeable change in how much we owe each month. So I think it has been working well.
So look at your bi-weekly plan. It might just be easier to pay a little extra each month.
the math works but it must be applied by the borrower and yes you can pay off in most cases about 9 years early thus saving excessive interest
