I got a letter in the mail from the bank that says paying our mortgage payment bi-weekly instead of monthly could save us $40,000 to $100,000 in interest and reduce our mortgage term by 7 to 9 years without refinancing. How does this work?
2007-10-22 13:06:28 · 5 answers · asked by honeybear 5 in Business & Finance ➔ Credit
The "interest on 15 days instead of 30" isn't always true. Many mortgage companies who offer this program just hold the first half till the second half arrives. The mortgage company might make some interest, holding all those half payments for 15 days, but you don't.
The real benefit is that paying every 2 weeks make for 13 months. You make an extra payment which goes right to the principal.
You don't need to pay the mortgage company the $300 or $3000 (whatever the current fee) to set this up. You can pay extra on your principal anytime you want. Even paying as little as $10 every month will shorten your loan.
2007-10-22 13:22:21 · answer #1 · answered by bdancer222 7 · 2⤊ 0⤋
I am currently taking a finance course that discusses mortgages as well. We have a mortgage loan officer in our course and he explained to us this concept last week. This is what happens:
A. You end up paying more of your principal sooner and therefore pay less interest over the period of the loan because 1/2 of your payment only gathers 15 days of interest and not 30.
B. The other issues is that if you make payments biweekly you end up, normally, having a higher monthly payment. A year has 52 weeks so you would end making 26 payments which would equal 13 months worth of payments in a year.
if you can afford it, definately choose this option and choose a 15 year versus a 30 year mortgage.
best of luck.
2007-10-22 13:13:16 · answer #2 · answered by teodor d 2 · 2⤊ 0⤋
Teodor has the correct answer, but I will add to it That you can do this on your own. You do not have to pay a 3rd party to set this up. You can coordinate this with your mtg co. Also when you make extra payments to the principle, make sure you do so with a separate check and specify that it is to be applied to the principle.
2007-10-22 13:21:34 · answer #3 · answered by ijokey2000 2 · 1⤊ 0⤋
It reduces the amount of interest you pay by paying down the principal sooner.
2007-10-22 13:08:44 · answer #4 · answered by Anonymous · 1⤊ 0⤋
I just used on-line calculators to compare the difference. It is almost nothing. This is crap.
2015-04-21 13:34:40 · answer #5 · answered by David 1 · 0⤊ 0⤋