One of the popular ways to save money on mortgages is to use what is known as the biweekly mortgage payment plan. With the biweekly mortgage payment plan the borrower makes payments on his mortgage every two weeks, instead of once a month. The biweekly payment is one-half of the monthly payment. So, if you converted from a monthly plan to the biweekly plan and you had been paying $2000 a month for your principal and interest, you would now be paying $1000 every two weeks. There is no doubt that this will save you money. By using the biweekly mortgage payment plan, you'll pay off your loan much earlier than you would have if you continued to pay monthly. Typically, a biweekly plan will pay your mortgage, in full, 7 to 10 years earlier, on a 30-year mortgage, than a monthly plan will.
At first glance, it looks like the biweekly plan is magical. In reality, however, there is nothing magical about a biweekly mortgage payment plan. The reason a borrower is able to pay off his mortgage sooner with a biweekly plan, is because he is, actually, making additional principal payments. In the example above, where a $1000 payment is made every two weeks, $26,000 is being paid toward the mortgage every year. This is because, quite simply, there are 26 two-week periods in a 52-week year. With the regular $2000 per month plan, $24,000 is being paid per year.
Now, let's run the numbers on this $2000 a month mortgage and see what happens when we convert to a biweekly payment plan. With a thirty-year mortgage at 7.5 percent interest, our borrowed amount is $286,035.25. First, we go to an online biweekly mortgage calculator. An excellent one can be found at the page titled "Biweekly Mortgage Converter" at: www.ezcalculator.com. Here we enter our borrowed value, $286035.25, our interest rate, 7.5 percent and our $2000 a month payment. Now click the "click here to calculate" button. The results at the bottom of the page show us that we would save $114,697.00 by converting this mortgage to a biweekly payment plan. This seems astounding! Doesn't it?
Here's what makes it less astounding. In our same on-line calculator we will go to the page titled "Save Big on Your Mortgage." Here we will enter our interest rate, our borrowed amount and our $2000 monthly payment. Then, in the extra payment box, we will enter $166.67. Why $166.67? As we noted before, when we pay a biweekly mortgage plan, we end up making one extra monthly payment per year. In our example, $2000 is the amount of the extra yearly payment. $2000 divided by 12 means we would be paying $166.67 extra monthly if we were simply paying extra principal each month, instead of converting to a biweekly plan. Now, we have our numbers entered in the "Save Big on Your Mortgage" calculator, so let's click on the "click here to calculate" button. Now, look down on the bottom of the page to see how much money we would save by doing this. We find that, in this example, the saved amount is $113,682.90. Not a whole lot less astounding than the biweekly plan, is it?
The reason the biweekly plan saves you a little more than $1,000 more than the "pay a little extra each month" plan is that you pay $1,000 two weeks sooner with the biweekly plan. You could save just as much by doing this with your own plan, or, try this: Take the $1,000 first biweekly payment and divide it by 360 payments (30 years). Now take that $2.78 and add it to your $166.67 extra payment and enter this $169.45 in the extra payment box in the "Save big on your mortgage" calculator. All other entries being the same, you will save $115003.69, or a little more than the biweekly plan. You see, the biweekly plan forces you to start paying down your interest sooner than a monthly plan because you start paying 2 weeks sooner. To compensate with your own monthly plan, you have to make that first biweekly payment, even if over the course of 30 years, in order to pay the same amount into the mortgage in the exact same time as the biweekly plan. That, in itself is a pretty astounding thing about biweekly plans that noone will ever tell you.
Here's what's astounding to me! When you convert to a biweekly plan, leading lending institutions charge you between $400 and $1300 and some lesser known biweekly conversion companies charge you a monthly fee which can amount to $10,000 and up when all totaled! As you've just seen, you don't need to pay these excessive fees because you can get the same effect of a biweekly mortgage plan by simply keeping the mortgage you have and paying the same amount of extra principal each month. Certainly, if you know where to find a free online mortgage calculator, that will work such numbers, you'll be able to institute your own plan. You'll be able to pay an extra amount you can afford each month and you will know how much that extra principal payment will save you in the end.
Also worth noting is; when you commit to a biweekly plan and the extra money becomes too much for you to pay some month, you'll get hit with a late charge for not paying on time. If you institute your own plan, maybe you'll be a little short and not able to pay the extra amount some month, but it won't cost you a $35 to $70 late charge.
So you think my calling biweekly mortgage plans, "a scam", is being a little harsh? I don't think so, in fact, I think they are out and out robbery!
Ed Lathrop is a successful Real Estate investor. He has developed EzCalculator.com, a Mortgage Calculator that calculates anything to do with mortgages, shows you how to pay off credit card debt quickly and much more. EzCalculator includes the famous "How to Make $100,000 on Your Mortgage" calculator. There are no popup's or spyware at this site and it is not affiliated with any lender or broker. Come visit this free site at Free Mortgage Calculator!