There are a variety of ways to payoff your mortgage early, don't be fooled into thinking you have to pay a fee to accomplish this.
Biweekly payments are just a gimmicky way to trick yourself into paying more than the minimum payment on your mortgage over a year's time. Lenders will skim a little extra off the top by charging you a setup fee and perhaps a monthly processing fee for something you can do for yourself for free.
Mortgages are based on 12 payments per year. Except when you are paying it off or refinancing or prepaying the first partial month interest on a new mortgage, interest accrues at 1/12 of the yearly rate regardless of the number of days in the month. Also, the payments are posted at the same time every month.
Since mortgages are based on 12 payments, but there are 52 weeks in a year, then when you make 26 half-payments that is 2 extra half payments on the principal every year. You will get the same net effect by adding 1/12 of the payment as extra on the principal with each regular payment, or by adding half a payment once every 6 months, or 1 full payment extra on the principal every year.
Most lenders just hold your mid-month payment until the normal end-of the month posting date, then credit both half-payments on your normal amortization schedule. About twice a year there will be an extra half payment to apply to reduce the principal. So essentially, you are letting them use your money for free for an average of two weeks every month. And you will not see any reduction in your mortgage balance or schedule except in those two months when the extra half-payment is credited.
In addition to avoiding biweekly payments, also avoid all the new multi level marketing mortgage accelerator schemes that essentially pay somebody else a big lump sump for some magic software that only shows you something you can already do better and cheaper by yourself.
The only way you can save time and money on any mortgage is by paying more than the minimum payment schedule. You will never save more interest on your loan by giving any of your money to others as closing costs, startup fees, monthly processing fees, entry fees, or higher interest rates on gimmick HELOCs instead of paying all of your spare money directly on your own mortgage.
Before paying extra on a mortgage is that whether you are following Dave's steps to the letter, or just want to put your money to best use, you will be better off eliminating most consumer debts and definitely should be maxing your pre-tax retirement investment opportunities before putting much if any extra on the mortgage. In the case of retirement funding, you can end up losing far more in compound interest earnings by postponing retirement contributions than the after-tax money will save on the debt.
Labels: Mortgages, retirement
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