The History Of Biweekly Mortgages
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 $2,000 a month for your principal and interest, you would now be paying $1,000 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, on a 30-year mortgage, a biweekly plan will pay your mortgage in full, 7 to 10 years earlier than a monthly plan will.
A Magical Payment Plan? 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 $1,000 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 $2,000 per month plan, $24,000 is being paid per year.
No Magic, Just Trickery! Now, let's run the numbers on this $2,000 a biweekly 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. With a borrowed amount of $286,035, at an interest rate of 7.5 percent and a $2,000 a month payment, you would save $114,697 by converting this mortgage to a biweekly payment plan and making payments of $1,000 every 2 weeks. This seems astounding! Doesn't it? Here's what makes it less astounding. Using the same numbers with a monthly plan, except using a monthly payment of $2,166.67 instead of $2,000, the saved amount is $113,682.90. Not a whole lot less astounding than the biweekly plan, is it?
The Astounding Part Here's what's astounding to me! When you convert to a biweekly plan, leading lending institutions charge you between $375 and $1,300 and some lesser-known biweekly conversion companies charge you a monthly fee that can amount to more than $10,000! 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 a little extra principal each month. Certainly, you can institute this plan without paying any upfront fees! 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 $100 late charge.
It's Just a Scam When you study the history of biweekly mortgages, you'll see it impressed people when they didn't realize they were actually making larger payments on a yearly basis. Thinking they were making the same payment each month, but just paying half of it sooner, made them think paying $1,000 to convert to this plan was a bargain. Now that the word is out that there is absolutely no advantage to making payments with a biweekly plan instead of just paying a little more toward principal each month, the biweekly plan should soon die and be buried along with all the other great scams of our time!
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