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Bi-Wkly or Monthly?


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Mortgage companies must think the average person is totally stupid.

After getting our mortgage, we received an incredible (according to them) offer to have payments bi-weekly, which means you make 1 extra payment per year, thereby trimming 7 yrs or so off the mortgage.

For this awesome deal, they will only charge around $400 to make the switch. We had already figured out ahead of time that we are going to make $xx extra on the payment per month to get that extra payment in every year.

It works out basically the same, and we are not paying them $400 to do what we can do ourselves!

My point is, if you think you want bi-weekly, set it up that way in the beginning so they can't suck you into it later and take more of your money.

We chose to add to the monthly payment for the main simple reason that we can determine what we can afford extra each month.

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my sis pays bi weekly now- hope she didnt pay 400 or whatever to change i will have to ask her...i told her she could just have made the payment herself. she said yeah i know but this way she is "forced to make it" and wont blow it on christmas shopping or whatever - she can afford it so its good for people that are tempted to spend that extra payment on something else..

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The dealer slipped some paperwork in on my Mazda5 deal for bi-weekly payments. Said it cost 2 dollars a payment for auto transfer and I can cancel anytime.. I thought well.. ok (just let me out of here!)

Get home, read the "fine" print. First payment is applied to their "fee" of 399 (my payments are 300 a month) and the rest of the "fee" is deducted over "future" payments.

I saw it as putting me behind the 8 ball. Then my phone rings. It's the new bank welcoming me to the family. And by the way, we offer FREE (REALLY FREE!) automatic payments monthly or bi-weekly or anytime you want the payment withdrawn from your bank.

So I signed up with the banks free service at 100 dollars per-week. Was told this shaved off close to 1 year of my loan, I thanked them, and called the place the dealer set me up with.. The buttholes wanted 25 dollars to cancel the darn contract! Since I had to cancel that day or they'd nail me with their fee the next business day (it was a friday) I ponied up the cash and went straight to the dealer.

I got a free oil change for my car and my 25 bucks back. I was in the otherday for some warranty work. The guy that did my loans office was empty. like cleaned out empty. Sales guy said he can't say what happened but it's a well known fact that the company that has my car note offers that service for free. But the pay one has a nice "spiff" for the guy that sells the agreement.

I have already made 400 dollars worth of payments on my car and the first payment is not due till 01/01/08!

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my sis pays bi weekly now- hope she didnt pay 400 or whatever to change i will have to ask her...i told her she could just have made the payment herself. she said yeah i know but this way she is "forced to make it" and wont blow it on christmas shopping or whatever - she can afford it so its good for people that are tempted to spend that extra payment on something else..
Doesn't matter if it is bi-weekly or monthly. It is the amount of payment that you make PER YEAR that matters. They are charging $400 to point out to you that on the calendar, there are 26 biweekly (13 monthly) payments to be made- due to each month having a few days extra in addition to the 4 weeks. This is your 13th monthly payment every year.

So the exact same amortization compression occurs if you have them draft out an additional payment each month along with your regular mortgage payment. The additonal payment should be equal to 1/12th of the monthly principal and interest amount (ignore MI, Taxes, insurance). That is the same as a 13th payment and gives you the 7 year "equity builder" effect.

If you have them autodraft your entire mortgage payment (along with additional payment), then you are forced to make the extra payment. They do this for all three of my mortgages- three different servicers.

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  • 2 weeks later...
Well I've become a huge fan of Suze Orman and in her book she says don't go for the bi weekly plan, especially if you don't plan on staying there the loan term.
I wonder if she tells you why. The fact that she says, "...especially if you don't plan on staying there the loan term" makes me think that she doesn't get it either. Whether you are staying one month or 30 years, there is no advantage to biweekly. It is a made-up advantage to sell a product you can do yourself for free. ;)
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Give Suze a week or two and she will tell you it's a great idea.

Added with sarcasm: I really want to send my mortgage payment to a third party and let them be in charge of making sure my house payment gets paid on time. To me it sounds like another accident waiting to happen.

I also want to be in control of when I make extra payments and how much of an extra payment I want to make. If something comes up and cash is a little short on a given month, then I do not want the obligation of a larger payment than is necessary. Other months may include more than a set amount, and a larger payment to princpal can be made.

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I wonder if she tells you why. The fact that she says, "...especially if you don't plan on staying there the loan term" makes me think that she doesn't get it either. Whether you are staying one month or 30 years, there is no advantage to biweekly. It is a made-up advantage to sell a product you can do yourself for free. ;)

Basically she said those bi weekly payments have set up fees. She gave $500 in her example. I'll -read it again tonight and try to post.

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Give Suze a week or two and she will tell you it's a great idea.

Added with sarcasm: I really want to send my mortgage payment to a third party and let them be in charge of making sure my house payment gets paid on time. To me it sounds like another accident waiting to happen.

I also want to be in control of when I make extra payments and how much of an extra payment I want to make. If something comes up and cash is a little short on a given month, then I do not want the obligation of a larger payment than is necessary. Other months may include more than a set amount, and a larger payment to princpal can be made.

True, but direct deposit of your regular PITI plus an additional amount of principal makes life easy and sets it on autopilot. And you gain all of the benefits of biweekly payments even though you make them monthly. My lender lets me call and change the additional principal payment amount at anytime over the phone for free. So far I have increased it twice (as I increased rent on my tenants), but there may come a day when a large cap ex is required and I need to cut back for a month or two.
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From Suze Orman The Money Book for the Young Fabulous & Broke

Let's first lay out the basic lender pitch: Rather than pay your mortgage once a month, you can reduce the time it takes to get your mortgage completely paid off by splitting the mortgage cost into two payments a month (every two weeks). With a $1,000 mortgage, you would pay $500 every two weeks, rather than $1,000 monthly. If you did this, you would reduce the payback time on a 6 percent thirty-year mortgage by about 5.3 years. That's going to reduce your total interest costs a ton.

But here's the hitch. Paying $500 every two weeks is not the same as paying $1,000 a month. Given that there are 52 weeks in a year paying half your mortgage every two weeks works out to 26 payments a year. So that means that at $500 every two weeks, you will pay $13,000 for the year. If you stick with the monthly $1,000, you're only going to pay $12,000 a year. That's why you pay off the mortgage faster; you're paying $1,000 more each year!

If you are in a house that you plan on staying in for a long time, this can be a smart move. But please don't throw away money by signging up for your lender's biweekly mortgage. You will probably get hit with a start-up fee (300 to $500 or more) and service fees ($4 or so per payment, or $104 a year). I can't resist pointing out that if you instead invested that $500 and added $104 to the pot every year, you would have $6,905 after twenty-five years, assuming a return of just 5 percent.

That sounds a whole lot smarter than paying those lender fees - especially when you consider that you can achieve the same goal without the biweekly mortgage. Yep, you can create your own free plan for paying off your mortgage ahead of schedule.

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Suze gets a B-...

Let's first lay out the basic lender pitch: Rather than pay your mortgage once a month, you can reduce the time it takes to get your mortgage completely paid off by splitting the mortgage cost into two payments a month (every two weeks). With a $1,000 mortgage, you would pay $500 every two weeks, rather than $1,000 monthly. If you did this, you would reduce the payback time on a 6 percent thirty-year mortgage by about 5.3 years. That's going to reduce your total interest costs a ton.

But 99.9% of the accelerated amortization is NOT due to the timing, but to the extra 1/12 payment that is being made every month. This is due to a month being equal to 4.33333 weeks and not 4 weeks.

But here's the hitch. Paying $500 every two weeks is not the same as paying $1,000 a month. Given that there are 52 weeks in a year paying half your mortgage every two weeks works out to 26 payments a year. So that means that at $500 every two weeks, you will pay $13,000 for the year. If you stick with the monthly $1,000, you're only going to pay $12,000 a year. That's why you pay off the mortgage faster; you're paying $1,000 more each year!

Suze seems to realize this...no problems here.

If you are in a house that you plan on staying in for a long time, this can be a smart move. But please don't throw away money by signging up for your lender's biweekly mortgage. You will probably get hit with a start-up fee (300 to $500 or more) and service fees ($4 or so per payment, or $104 a year). I can't resist pointing out that if you instead invested that $500 and added $104 to the pot every year, you would have $6,905 after twenty-five years, assuming a return of just 5 percent.

The higher your mortgage rate is, the smarter it is to pay down your mortgage rather than save & invest it elsewhere. Mortgage interest is deducitble, and investments are taxable- they both need to be weighed net of tax based on rate.

NEVER smart to pay it down through a service. Do this yourself by paying more every month- or make an extra payment when you can.

That sounds a whole lot smarter than paying those lender fees - especially when you consider that you can achieve the same goal without the biweekly mortgage. Yep, you can create your own free plan for paying off your mortgage ahead of schedule.

It can be smarter to to save outside rather than pay down principal. Takes discipline. Also, there could be other factors that come into play. MI can't be dropped until 20% equity is created in the house. With stagnant home prices, if you can hit this years earlier by making the additional payment and foregoing investment, drop MI, and then either invest or pay to principal that money, then the balance falls towards paying down the mortgage.

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My point is, if you think you want bi-weekly, set it up that way in the beginning so they can't suck you into it later and take more of your money.

We chose to add to the monthly payment for the main simple reason that we can determine what we can afford extra each month.

Making extra payments on your loan principal will make a big difference.

Check with your bank/lender to see how they are credited however. Many banks will not give you credit for the extra payment every month, but once you have an entire extra payment in your account, then they will apply it. Some banks will ask that you send in two checks, the extra one marked extra principal.

Charles

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