Save Money By Paying Mortgage Weekly?

If paying your mortgage biweekly (every two weeks) cuts about seven years off your pay back schedule, then paying weekly should cut off 14 years, right? If you find a place where that works, let me know and I'll sign up with you!

Though there are international variations in the way mortgages are calculated, most United States home loans have some common characteristics. Two notable ones are that interest is computed monthly (usually at 1/12th of the annual rate) and that the interest is charged "in arrears," that is, after it was used. Though these can vary among lenders, most follow this format.

Therefore, your mortgage interest is the same for the month of March with 31 days as it is for February when there are only 28 days. In addition, any payment you make this month will not reduce the interest you owe next month, because of that "arrears" thing. It has already been established you will pay your interest rate times .o8 (1/12th of the rate) times your remaining loan balance.

One more basic to keep in mind: most U.S. lenders want to process your mortgage payment only once a month. Biweekly mortgage plans are usually implemented by companies external to your lender, and provided as a service to you (you pay a fee for the service) and to the bank (there are fewer mortgage defaults since the payment is automatically deducted from your bank account). It's a win-win-win. Properly implemented, you could pay back a 30-year fixed-rate loan in about 23 years, depending on loan specifics, of course. (For $200,000 at 6%, the technique eliminates nearly $50,000 of mortgage interest.)

I learned about this "hold for full payment" policy the hard way on a remote rental property on which the property taxes were increased. I paid my usual payment to the mortgage company. Next thing I knew, I got a 30-day late notice. A phone call to the mortgage servicing company revealed they weren't equipped to notify borrowers of property tax increases uploaded to their computers by tax assessment offices. Their method was to wait for the next month's payment, slice the $28 off needed to supplement the last payment, and carry me forward a month behind from then on. They-and other mortgage companies-are quite rigid about the "no partial payments" thing.

This is why for a biweekly payment plan to work, either an outside party collects your two week's worth of mortgage principal and interest and holds it for you until they collect the next two weeks' worth, then combines the two half-payments and delivers them to your bank; or your bank has a system in place, totally at their discretion, for applying your payments. Payments are usually still held and applied monthly, but a rare bank might actually apply the two-week portion when it is received.

The reason the biweekly payment plan works so effectively is that there are 26 two-week periods in a year. Fifty-two divided by two equals twenty-six. I hope by seeing how a biweekly plan actually works-which is a bit different from how most of us are used to thinking they work-the problems with a weekly payment plan become clear.

Lenders are not set up to accept payments four times a month, or 4.2 times a month (the average number of weeks in a month). You could operate your own weekly payment plan, with your year's payments due divided by 52. You would then set the money aside, not to spend it, until you have collected two (if you are also working with a biweekly service company) or four, if you are doing this completely on your own.

Either way, you are squeezing in an extra month's payment every year. And the best part about it is-if done correctly-that the 13th lump sum goes to principal only!

To receive a free report called "Warnings About Biweekly Payment Plans," simply check the box at www.letyourmortgagemakeyourich.com Or you can select the free list of credit card companies that pay rewards points directly to your home loan.

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