How much interest are you paying on your mortgage over the life of the loan? If you’ve got a 30-year fixed rate loan, chances are it adds up to almost twice the dollar amount of the loan itself.
For example, you would pay more than $183,000 interest on a $100,000 loan at 8.75 percent.
Virtually all of your monthly payment goes to retire your interest debt in the early years of your mortgage, and only later do you really begin to significantly pay off the principal. You finally own your home free and clear after the 360th payment.
Of course, you pay the interest cost for the privilege of borrowing the principal for a long term-30 years. But what if you could pay the principal off a little faster?
The biweekly mortgage is one way homeowners can reduce their loan term and save considerably on interest costs, by changing the payment schedule from once a month to once every two weeks.
By making 26 payments a year, you work down your outstanding balance much faster, retiring your mortgage debt in anywhere from 18 to 22 years, depending on the lender and the program.
But biweekly mortgages are not readily available.
“This product is not widely used in the market,” said Timothy Murphy, vice president and general manager, Talman Home Mortgage, Norridge. “It’s a product that we are able to sell because it’s a niche.”
For special types of buyers, though, this can be a good mortgage program.
“There are two advantages,” said Kerry A. Pastore, branch manager of Fleet Mortgage Corp., Chicago. “The equity buildup is faster, so even if you sell after five years you have more equity, and if you plan on making this your (long-term) home, you’ll pay down the mortgage in approximately a 17-year term.”
Fleet markets a biweekly as the Bisaver Program mortgage. The key to this mortgage is fiscal discipline on the part of the homeowner-and a steady cash flow.
Many biweeklies rely on electronic funds transfer or an automatic withdrawal from a bank account to streamline the payment process. This high-tech twist eliminates the paperwork involved in mailing checks and coupons.
The homeowner must be ready to make these payments, and keep the account balance high enough to cover the mortgage payments twice a month.
LaSalle Talman does require that a checking account be kept at a Talman branch for the purpose of the automatic deductions. The account is interest-bearing, so the homeowner gets that advantage while money is in the account.
The interest-saving feature of the mortgage stems from its quicker payoff time. This varies, depending on the amortization schedule that the lender uses.
Murphy provided amortization schedules comparing a biweekly payment plan to the traditional 30-year, fixed-rate mortgage:
At 8.75 percent interest, the monthly payment of principal and interest on a 30-year loan would be $786.70. If a buyer were to obtain a biweekly mortgage at the same interest rate, the buyer would be making a $393.35 payment of principal and interest every two weeks.
Although the monthly outlay is the same, the buyer will save substantially on interest. Total interest on the 30-year loan would be $183,213, but $125,272 on the biweekly.
The biweekly mortgage isn’t for everybody, but if your income is steady, and you are disciplined enough to handle the payment every two weeks, you can save substantial money.
