When a borrower enters into a contract to make bi-weekly payments on their mortgage, the amortization schedule is accelerated. For example, with a 30-year amortization schedule, the borrower makes 12 payments per year. In a bi-weekly arrangement, the borrower makes 26 'half' payments, which allows the loan to be paid off in 22.8 years instead of 30 years. It's the same as making 13 monthly payments.
This ultimately saves the borrower thousands of dollars in interest rate fees. However, bear in mind that bi-weekly programs usually have some type of setup, transaction, and maintenance fees associated with them. A custodian manages the bi-weekly payments in a trust account (and also makes a profit on the interest accrued there). Because the lender really doesn't accept partial payments, this middle man is still making monthly payments to the lender on some type of pre-payment schedule.
It is important for the consumer to know that the same results can be achieved without hiring an outside company to do this. As long as your loan program carries no pre-payment penalty, pre-payments can be made on a monthly or annual basis to shorten the loan term to save money on interest or remove PMI charges on loans that have less than a 20% down payment. The borrower simply needs to indicate the extra payment is being made toward the principal balance, and have the discipline to make these extra payments as scheduled.
You are right. I advise my clients pretty much the same thing. I do find that you tell them this, but they really don't usually make those extra payments on their own. Most lenders do accept the bi-weekly payments and do have their own system of deducting out of your checking or savings.
Usually if you set this up at closing, there isn't a set-up fee. Every lender is different of course. The third party companies can be expensive. A monthly fee is involved. It seems to be around $3.50 or more. This can still out way the savings and convenience of the bi-weekly, certainly if their payroll is direct deposit.
I guess it is really important to disclose all of the fees upfront, that way you don't look unprofessional when they call you and ask questions about fees that they didn't know about.
Julie - Thanks for stopping by. You make a very good point. Many customers have every intent of making the extra payments on theirown, but have trouble following through. There is definitely something to be said for paying a nominal fee to ensure the bi-weekly payments are being made.
Great post, Karl. I will also tell my clients, when we are on this particular subject of prepaying, that they can actually choose to make a payment in the month after they close, which will start the benefit of prepaying immediately.
Thanks for sharing this great info.
Donna
Donna Mitchell, Home Loan Consultant, wwww.donnasgotmoney.com
Blog: Donna's Got Money
ActiveRain Group: Got Money?
Not always true. At M & T Bank we do not have a custodian taking the money into escrow. When the payment is made, it is put directly onto the mortgage. There are NO set up frees, only thing, the money will be taking out of a checking account as an ACH.
I find it is wonderful program. Most people get paid twice a month, would it not be logical to pay your mortgage twice a month? So that one week is not all for mortgage and the other bills are pushed to the side.
No outside service, M & T services 95% of our mortgages.