Just type “biweekly payments” into Google and you’ll be inundated with links to blogs and personal stories about all the scams and misleading options that exist today. One story I read involved a consumer that started making biweekly payments to his mortgage in an effort to save some money. He later found out he really wasn’t saving anything. Not only were his payments being held by the lender and only applied once a month, but he was paying $117 a year to have this option! Ouch!
Stories like this one have generated a great deal of skepticism about the validity of biweekly payment arrangements, and for good reason. As consumers, you’ve been convinced that biweekly payments just don’t make that big of an impact. The truth is biweekly payments can significantly reduce the amount of interest you pay over the life of a loan. Here’s why:
- The real magic of a biweekly payment is in the number of payments. By paying biweekly, you make 26 payments in a year. As a result, you make one extra monthly payment per year.
- The increased frequency of payments results in paying down the principle (your original loan amount) faster, which reduces the amount of interest you pay over the life of the loan.
Consider the following example:
On a $150,000 mortgage with a fixed interest rate of 5.00% APR over 30 years, you could choose to make a monthly payment of about $805 and pay about $140,000 in total interest. OR you could make about $402.50 payments on a biweekly basis and pay an estimated $113,300 in interest. That’s a savings of over $26000 in interest!
With an opportunity to save this much, why doesn’t everyone make payments biweekly? Lenders, unfortunately, have caught wind of what’s going on here, and they want to protect the income generated by your loan. It’s not convenient to them for you to make biweekly payments, and it costs them money, more than they’re willing to pay. As a result, they’ve continued to make it harder for you to see the benefits of making biweekly payments to your loans. For example, one mortgage company charges a higher interest rate for borrower’s interested in making biweekly payments. Another mortgage company charges a fee for each payment received on a biweekly basis, amounting to about $20.00 a year.
How do you know if it’s a good deal for you? Ask your lender the following questions:
- Can I make biweekly payments to my mortgage? Surprisingly, many mortgage companies simply will not accept a less than full payment on a mortgage loan.
- If I begin making biweekly payments to my mortgage today, how will they be applied? If they will accept the payment, but won’t apply it to your balance until a full payment is received, there is no savings to you.
- What is the fee to convert to biweekly payments? Depending on the fee amount, it may still make sense. You’ll want to do the math though. If the fee is higher than your interest savings for the time you plan to own your home, this is a bad deal. Of course, any bank that charges this fee is just trying to discourage you so they can recoup interest costs in one way or the other. They think they are smarter than you. They aren’t.
- For a new mortgage loan, is there an interest rate increase for making biweekly payments instead of monthly payments? Again, this may still work out to your advantage, but you’ll have to crunch the numbers. If you have to keep calculating how to get ahead of the banks fee structure or rate increases - do you really trust them with your home?
- Is there a prepayment penalty? Some mortgage companies stick with a hefty fee for paying your mortgage off early. Make sure the amount of interest you save is much more than the fee, so you’re still getting a better deal.
At Affinity Plus, you can arrange biweekly payments to any mortgage at any time for no charge and you’ll never pay a penalty for paying your loan off early. You won’t find any fine print or hidden agendas here. Simply give us a call and we’ll gladly modify your payment arrangement to help you keep more money in your pocket. It’s what’s right for you! Will your mortgage company do the same?