How much will you save with bi-weekly mortgages and how will you get rid of PMI?
The right mortgage payment plan can help you put your children through college or help you reach your retirement goals. And the right strategy up front can save thousands in non tax-deductible fees.
If you want an adjustable rate mortgage (ARM) for the lower start rate but are afraid of potentially higher monthly payments when it adjusts, a bi-weekly payment plan may be just what you have been searching for.
Mortgages are typically paid once every month, 12 times a year. A bi-weekly payment plan differs in that half of the normal payment is paid every other week. That means a bi-weekly contains 26 (52 weeks divide by two) half payments – amounting to 13 full payments each year. And that one extra payment per year can do some very important things.
For instance, many families worry about how they can afford to save for their children’s college education. If your mortgage amount were $200,000 at 8.5 percent for 30 years, a bi-weekly payment plan could give you more than $50,000 in additional equity to draw upon for college expenses. (This calculation assumes you make half of your normal monthly payment every two weeks, essentially kicking in an additional month’s payment each year.)
This kind of savings can be a real help to families without a current college education savings plan for their children. That $200,000 loan will be paid off in about 20 years instead of 30. Individuals hoping to retire without a house payment can reach that goal more easily by using this strategy.
Today, more than one-third of borrowers contribute a down payment of less than 20 percent. Most must pay an additional fee known as private mortgage insurance (PMI). This fee is non-tax deductible and on a $200,000 mortgage costs about $85 per month. This insurance is terminated once a borrower reaches a 20- to 22-percent equity position in the property. Most people don’t realize that it can take 16 years to reach that position. The bi-weekly plan can get you there in 6 years, saving 10 years and 120 payments of $85. The total savings of $10,200 is understated because of the tax consequences and the time value of money. In the 28-percent tax bracket the $85 monthly savings is more like $118 per month. If that money were invested back into the mortgage by prepaying it, there would be a guaranteed return on the additional payment of 8 percent. The total savings would be in excess of $22,000. This is only the savings on PMI; there are additional savings on interest as well as home equity build up.
Many consumers today would like to use an ARM mortgage rather than a higher-rate fixed loan. The catch is that while ARM loans start off with a lower monthly payment, it is possible for them to rise above the current fixed-rate offering in the future. The bi-weekly program can give you the best of both worlds. In the example of a five-year ARM (in which the rate remains fixed for the first five years but can then adjust annually for the remaining term), a bi-weekly can build enough equity so that the payment may actually drop after 5 years even if the interest rate on the ARM goes up.
A bi-weekly payment plan can be added to any loan. There is no approval process, but there is usually a nominal fee. It is important to note that unless your mortgage has a prepayment penalty you can do this yourself by making one additional payment per year. That takes a lot of self-discipline since spare cash in great amounts can be tough to come by. Additionally, there is no immediate gratification for making the payment. The reward comes years later when you look at the additional tens of thousands you have added to your net worth.
This article is based on information and research from articles written by Barry Habib