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Bi-Weekly mortgage payments from GMAC that save you 50K?!?!?


edubb007
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my understanding of paying 2X a month is essentially it nets you 1 extra payment per year, and presumably over the life of the loan can save you a lot in the interst side of it. the set-up fee i am not to sure of, seems like it is unjustified, as you could easily write the mortgage comp and state that any extra monies received be applied to principal, but like i said i am not real sure and would wait for advice from someone more familiar....

i have personally found a wealth of helpful info at www.bankrate.com and heres an article to your specific question that may help.....

http://www.bankrate.com/brm/news/mortgages/20030206a1.asp

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There are two differnt programs like this that I've seen. The one described by chesire seems to be the most prevalent, but makes the least sense to me.

You have a company, or your lender, draft your account every two weeks and make your mortgage payment monthly. This leaves a surplus of one extra payment at the end of the year that they then pay towards principal. Depending on your interest rate, that payment can equal or exceed a full year principal payment in the early years of the loan.

It is in effect a forced savings plan similar to maxing out your tax withholdings so you receive a bigger refund at the end of the year. The lender also likes the program if they administer it themselves because they know what day the money will be drafted and they don't have to pay people to process checks and such. In the end you are paying someone to force you to save money, take an interest free loan from you and to reduce the expenses of processing your payment.

The second plan seems to me to make much more sense, by itself or in conjunction with the first plan that you can administer yourself. You arrange your loan at the start or pay to have it restructured(reamortized) for 24 payments a year rather than 12. The savings comes from not paying interest on half of a regular monthly principal payment for half the month.

On a $100,000 loan for 30 years at 7% interest:

12 payments per year $139,509 total interest expense

24 payments per year $93,751 total interest expense

You save $45,758 over the life of the loan by making payments twice a month rather than just once a month.

The problem with plan 2 is that you have to either set it up in the beginning or have your lender agree to reamortize your loan for 24 payments per year rather than 12. Most lenders will not apply a partial loan payment so if you just split your monthly payment in half and mailed it twice a month the first amount you paid would sit in their account, not reducing interest expense for you, until the second payment arrived and was accepted as a full payment.

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A way to self administer this kind of savings if you get paid biweekly:

Put half a house payment in savings every paycheck. Each month pay your house payment from savings. Every 6 months, send the extra half payment left over to the mortgage company as an additional principal payment.

In this case (for the example mmmmaybe gave) you pay $94,282 total interest PLUS you pay off at the end of year 21, 9 years early.

Great in principle if you have the discpline to make it happen consistently.

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DF sends 4 payments per month, 2 on each loan. The first 2 go to principle and the 2nd 2 go to put her another month ahead.

Does this seem sound?

Extra principle payments certainly put you ahead but I'm not quite sure what you're describing. Are these morttgage payments ?
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Not to me DocPC. Again, you would be making an interest free loan to the lender until they actually apply the payment.

Are the loans you're talking about student loans? The reason I ask is that I used to make extra payments on my wife's student loans and they would try and pull the "we'll apply it to your next payment" trick. If I wanted it applied to the next payment I would have sent the check when the next payment was due.

If the intent of the extra payment is to decrease the amount of principal owed and reduce interest expense then you must insist that the payment is applied correctly. I'm amazed at the way some lenders take advantage of consumers by acting like they don't understand the intent of an extra payment. By doing this they make interest off the loan and off the extra payment for an additional 30 days.

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These are a 1st and 2nd mortgage payment.

She pays a full payment every 2 weeks, and alternates between applying towards principle and to getting ahead in months.

For example her next payment is not due til May first. This is New Century and they have options on the payment coupon to apply towards principle any amount you want.

Does that make it any clearer?

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The principal payments are good. That will reduce the interest expense.

I'm not sure why she wants to prepay a payment not due for another month or more. At a minimum she would be better off holding onto the money she's earmarked for future monthly payments and earn interest on it. Then send it in when it's due.

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Wow, if she makes the normal scheduled payment PLUS an extra full payment each month she's doin' pretty damn good, IMO. My fur hat is off to her !

She just has to confirm mortgagor IS CREDITING PRINCIPLE only on those extra payments like mmmmaybe said.

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Sorry, I know you made the comment for mmmmaybe, but I'd be surprised if paying her mortgage "six months ahead" would get the mortgage company to allow her to stop for 6 months if need be. Careful there !

She gets a new coupon every time she sends a payment. Her next payment due date is 5-01-05. She will pay that one for principle only. When she gets her next coupon, it will have a due date of 5-01 again. That one she will pay against the note. The next one she gets will be due 6-01-05...

She has been doing this since before her 1st payment was due on 1-01-05. She was 2 months ahead before her 1st payment was due.

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I understand what she's doing, but I'm not sure why. What reason does she have for sending the advance payments to the mortgage company instead of just putting them in an interest bearing account?

That's what I asked her. She said something about having a large amount of cash in the bank (or whatever) would cause the bank to report any interest above $10.00 to the IRS and she doesn't want to pay taxes on it.

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Like mmmmaybe, I'm not seeing the logic. Sending the money early just lets the mortgage company earn extra interest on the money when she could be earning interest on it. I don't see how she'll ever get 6 months ahead that way. She's much better off having 6 months worth of payments reserved in a savings account.

Extra principle payments are great but paying interest early without making the mortgage company earn their interest by waiting doesn't make sense.

Extra principle payments at the rate she's paying will get her REALLY far ahead but at the BACK END of the loan. It won't prevent her from having to pay at least once a month until it's all paid -- unless she's got a really unusual mortgage I've never heard of that actually allows for that somehow.

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Like mmmmaybe, I'm not seeing the logic. Sending the money early just lets the mortgage company earn extra interest on the money when she could be earning interest on it. I don't see how she'll ever get 6 months ahead that way. She's much better off having 6 months worth of payments reserved in a savings account.

Extra principle payments are great but paying interest early without making the mortgage company earn their interest by waiting doesn't make sense.

Extra principle payments at the rate she's paying will get her REALLY far ahead but at the BACK END of the loan. It won't prevent her from having to pay at least once a month until it's all paid -- unless she's got a really unusual mortgage I've never heard of that actually allows for that somehow.

But keep in mind that she is a REAL blonde..... 8-)

I'll tell her what you said, and it does make sense to earn interest on her money.

Like I said, her next payment coupon says it is not due until 5-01. I will have her call and make sure that is correct.

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Amazingly enough, I was just reading about this subject earlier tonight in a "how to save on everything" book. It does say that by making bi-monthly payments you do pay an extra payment each year and will pay off your loan years early saving thousands in interest. The book uses a 100,000 mortgage at 7.5% for 30 years as an example and says "paying 1/2 of your normal montlhy payment every two weeks you will cut as much as 10 years and 75,000 in interest off your mortgage" Evidently, this does work BUT the book stresses that you must make sure your mortgage company properly credits the payments get it in writing that "all payments in excess of normal amount due will be applied to principal" and in the event you make a full mortgage payment and an extra monthly payment be sure to write "APPLY TO PRINCIPAL ONLY" on your check. The book stresses that most companies do not properly credit extra principal payments - unles this has been previously arranged - so you must monitor the situation and keep copies of all your checks so you can prove the extra principal you have paid. See next post for alternative suggestion

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Another alternative to save on mortgage interest and pay off in fewer years, is to run an amortization schedule on your current mortgage. Banskrate.com and hsh.com are supposed to have good amortization calcculators. Each month pay your normal monthly payment and send a second payment marked "apply to principal only" for the next months principal amount (which will be shown on the amortization) You can ask your bank or mortgage company to send you an amortization schedule, they may or may not because they really don't want you to pay off this loan early!

The final suggestion in this book is to divide your monthly payment amount by 12 and send this amount in extra every month marked principal only. This is usually the smallest amount as opposed to the other methods and great for those, like me, who have very limited "extra" funds!

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Another alternative to save on mortgage interest and pay off in fewer years, is to run an amortization schedule on your current mortgage. Banskrate.com and hsh.com are supposed to have good amortization calcculators. Each month pay your normal monthly payment and send a second payment marked "apply to principal only" for the next months principal amount (which will be shown on the amortization) You can ask your bank or mortgage company to send you an amortization schedule, they may or may not because they really don't want you to pay off this loan early!

The final suggestion in this book is to divide your monthly payment amount by 12 and send this amount in extra every month marked principal only. This is usually the smallest amount as opposed to the other methods and great for those, like me, who have very limited "extra" funds!

As I said above, her payment coupons have a section that lets you apply any or all of the payment to principle. She pays about $50.00 extra on each payment as well. Even the ones that go against the note. She rounds them up to the next 50 or 100 ie: $225.00 goes out as $250.00 and $550.00 goes out as $600.00. She marks the extra as apply to principle.

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