The housing market has been heating up over the summer, with both pending and existing home sales posting their strongest showings of the year in July.
Bi-weekly Loan Programs
Normally, you borrow mortgage money from a lender and make one payment per month. During the first years of the loan, the payment usually covers interest charges, but not much principal. As the loan matures, you nibble away more and more at the principal, which is where the real savings begin to manifest. The faster you can pay off the principal, the more money you can save. To accelerate the process, some homeowners make two payments a month instead of just one.
Here's an example: If you borrow $100,000 at 7 percent interest on a 30-year fixed rate mortgage, your monthly payment of principal and interest will be $661. But what if you make one payment of $330.50 every two weeks? You'll spend exactly the same amount of money, but will reap the benefit of prosperous new math.
Because you're staggering the schedule of payments, you wind up making the equivalent of 13 monthly payments per year. That means that you reduce the life of your loan, without paying anything extra for this clever perk.
The reason it works out that way is that if you pay once a month you make only 12 payments a year. But there are 52 weeks in the year. If you pay every two weeks, you end up paying 26 times. Since you're only paying half ($330.50 versus $661 in our example), divide 26 in half and you arrive at 13 "full" payments each year.
Magically, you've added one full payment. Over the life of your loan, you can reduce your payback by about 5 years with this method and save yourself a significant amount of money.
Bi-weekly payments and mortgage loan fees
Some mortgage companies charge a fee to set up a bi-monthly program. This expense may be justified if you're not good at keeping to a schedule or deadline. But if you have enough discipline to mail payments every two weeks, you can set up your own bi-monthly program for free.
For the cost of the extra postage stamp each month, you can save yourself thousands of dollars over the life of a 30-year loan. Who said 13 was an unlucky number?
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