I have another deal for you.
Pay me $350 and I�ll arrange for you to pay half of your monthly
electrical bill every two weeks. At the end of a year, voila!, I will
produce a bonus for you equal to an average month�s bill. And I�ll
keep generating the bonus year after year. Do we have a deal?
The "magic" in both
deals is paying half the monthly payment every 2 weeks, which results in
an extra monthly payment every year. (Twenty-six payments, each one for
half of one monthly payment, is the equivalent of 13 monthly payments
rather than 12). This extra payment is the magic that pays off a biweekly
mortgage early, but you need not pay anyone to do the trick for you.
The biweekly mortgage dazzles
a lot of people because they confuse the interest payments over the life
of the loan with the interest rate. Total interest payments paid over the
life of a loan depend on the rate, on the amount borrowed, and on how
rapidly the loan is paid off. Converting a conventional loan to a biweekly
does not change the interest rate. What it does is to use the extra
payment you make every year to reduce the balance, which in turn reduces
interest payments. The loan is paid off early, just as it would have been
if you had begun with a mortgage carrying a shorter term.
In fact, borrowers taking out
a new loan who are attracted to the accelerated repayment schedule on a
biweekly, are usually better off with a conventional loan having a shorter
term. For example, 15 and 20-year loans often carry lower rates than
30-year loans, whereas a borrower taking a 30-year biweekly will pay the
30-year rate, even though a 7% biweekly pays off in about 23 years.
If you already have a 30-year
mortgage and are attracted by the prospect of paying it off early, here
are some ways you can do it yourself.
Use your bonus.
Many people receive bonuses at the end of the year. Adopt the practice of
sending your lender an additional check equal to the amount of the bonus,
marked "partial prepayment", along with your regular check for
the monthly payment. Note: if you make an extra payment equal to
your regular monthly payment once every year, you will pay off the balance
just as you would with a biweekly.
Increase your monthly
payment. Simply increase your current monthly payment by the amount
you feel you can comfortably afford. Check with your lender as to whether
you should write a separate check for the additional amount. Note: if you
add an amount equal to 1/12 of the payment, you will pay off the loan a
little earlier than if you take out a biweekly.
Establish a biweekly
deposit account. Start a new account with a bank that has an
automatic payment privilege, and arrange for it to make your monthly
mortgage payment every month. Then pay half the monthly payment into that
account every two weeks. At the end of each year, write a check on this
account for an amount equal to one month�s payment and send it to the
lender marked "partial prepayment".
All of these approaches
require some amount of self-discipline on your part, which you may or may
not be able to manage. Having a third party set up the procedure and then
legally obligating yourself to make the additional payments forces the
discipline upon you. In the last analysis, this discipline is the only
service you receive when you purchase a biweekly deal from a third party.
Whether you need it only you can decide.
Copyright Jack
Guttentag 2002
