Author Topic: Bi-Monthy Payments. Trick or Treat?  (Read 550 times)

Mr. Metal Mustache

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Bi-Monthy Payments. Trick or Treat?
« on: November 03, 2018, 07:49:29 AM »
My mortgage company recently contacted me and suggested I get setup for bi-monthly payments to save $ on my loan. (how kind right?). It is directly through them. There is a one time setup fee of $50. There is also a $2 draft fee per draft. If I pay the minimum for 360 months my total interest due is $109,741. If I do the bi-weekly payment and make the minimums my total interest due over a 360 term is $89,629. Technically thats a savings of $20112. Factor in the $50 setup fee and 720 payments times a $2 draft fee per payment = $1440

Final anticipated savings = $18,622

Am I clearly missing something or is this not a bad deal? The fees are annoying but I get paid weekly so a bi-weekly setup is not an issue. Even if I was paid monthly it wouldn't be an issue. Its all about management ;)

Currently plan to make the minimum payment for the entire term.

bacchi

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #1 on: November 03, 2018, 08:18:15 AM »
You have 12 payments per year and paying every other week is 13 payments. They just prepay the principal 1 full payment amount. You can do the same every December.

kpd905

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #2 on: November 03, 2018, 08:42:28 AM »
Add the equivalent amount to your current payments to end up with 13 payments a year, that way you have no setup fee and no extra draft fees.  Win-win.

Mr. Metal Mustache

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #3 on: November 03, 2018, 08:45:15 AM »
I think I understand. By making bi-monthly payments, effectively you're "prepaying" your mortgage to the extent of one extra payment a year.

So you could do this on your own for free by making one extra principal payment a year or by paying all the fees and have your mortgage servicer do the exact same thing that you are completely capable of doing instead.

nereo

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #4 on: November 03, 2018, 08:57:51 AM »
I think I understand. By making bi-monthly payments, effectively you're "prepaying" your mortgage to the extent of one extra payment a year.

So you could do this on your own for free by making one extra principal payment a year or by paying all the fees and have your mortgage servicer do the exact same thing that you are completely capable of doing instead.

Right.  There is no free lunch, and your 'savings' are entirely because you are making more payments per month.

I'm deeply skeptical of this $50 'setup fee' and $2/payment draft fee.  That is crap, and profit for the bank for no good reason when you could just increase your monthly payments and it would go directly to principle.

For what it's worth, it's generally better to put any extra money towards tax-advantaged and other investment accounts as opposed to a low fixed-rate mortgage - but that's another whole series of threads.

AccidentialMustache

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #5 on: November 03, 2018, 09:00:02 AM »
Who the hell charges extra (directly) to set that up and then charges per payment on top of that? Is this not ACH payments?

I'd +1 the extra going to invest as well. I've had a paid off mortgage and its nice... but you still have taxes and insurance, and at least where I am, that's about half the conventional mortgage PITI payment, so it isn't like you aren't paying... just less. You don't get out of taxes and insurance, so if you're happy to invest when only paying those, you should be happy to invest while paying PITI at the minimums too.

Just my take.

Imma

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #6 on: November 03, 2018, 09:03:32 AM »
I think I understand. By making bi-monthly payments, effectively you're "prepaying" your mortgage to the extent of one extra payment a year.

So you could do this on your own for free by making one extra principal payment a year or by paying all the fees and have your mortgage servicer do the exact same thing that you are completely capable of doing instead.

You'd have to run the numbers but I think the interest paid over the entire term of the mortgage ends up being lower this way even when you factor out the extra payment made per year.

Instead of paying interest on a 100k balance for a month, then on a 99k balance for a month you'd pay interest on 100k for two weeks, 99,5k for two weeks etc.

Mr. Metal Mustache

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #7 on: November 03, 2018, 09:38:26 AM »
Who the hell charges extra (directly) to set that up and then charges per payment on top of that? Is this not ACH payments?

I'd +1 the extra going to invest as well. I've had a paid off mortgage and its nice... but you still have taxes and insurance, and at least where I am, that's about half the conventional mortgage PITI payment, so it isn't like you aren't paying... just less. You don't get out of taxes and insurance, so if you're happy to invest when only paying those, you should be happy to invest while paying PITI at the minimums too.

Just my take.

Uh.. Yeah its ACH payments. It did seem like a joke, which explains the lenders "push/suggestion" for me to do it.


Mr. Metal Mustache

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #8 on: November 03, 2018, 09:44:45 AM »
I think I understand. By making bi-monthly payments, effectively you're "prepaying" your mortgage to the extent of one extra payment a year.

So you could do this on your own for free by making one extra principal payment a year or by paying all the fees and have your mortgage servicer do the exact same thing that you are completely capable of doing instead.

You'd have to run the numbers but I think the interest paid over the entire term of the mortgage ends up being lower this way even when you factor out the extra payment made per year.

Instead of paying interest on a 100k balance for a month, then on a 99k balance for a month you'd pay interest on 100k for two weeks, 99,5k for two weeks etc.

I think I see what you're saying and thats why I posted this. If I'm thinking of this as the same way you are, technically you're changing the amortization schedule? I was under that impression too but effectively I think the consensus is that by dividing your principle pay by 12 months and adding that to your normal payment for the life of the loan, or making an extra principal payment per year will yield the exact same results but with no extra fees.

Maybe I'm reading into this too much. I planned on no extra payments because I was going to invest the difference. But technically if I was making a bi-monthly payment I would be making extra payments on a weekly basis?

bacchi

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #9 on: November 03, 2018, 01:01:17 PM »
The amortization schedule doesn't change, at least for US mortgages.

The first bi-weekly payment is just kept in a special servicing account. When the 2nd bi-weekly payment is paid, there's enough for that month's mortgage payment. Eventually, over a year, your bi-weekly payments will overlap a month -- kinda like when someone gets paid 3 times in a month if they were paid bi-weekly.

Let's start this plan on Feb 1, 2019.

Feb 1 2019 - 1st payment
Feb 15th - 2nd payment, making a regular mortgage payment on 3/1
Mar 1 - 3rd payment
Mar 15 - 4th payment
Mar 29 -- 5th payment, due on 4/1 but there's an extra 2 weeks there. Boom! Principal drops more than expected.
Apr 12
Apr 26 -- 7th payment, enough for the 5/1 regular sized mortgage payment
etc.


Eta: Apparently, some banks/servicers just hold the excess until the end of the year and then make an extra payment to principal. It'll be in the fine print.
« Last Edit: November 03, 2018, 01:16:44 PM by bacchi »

Imma

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #10 on: November 03, 2018, 02:19:41 PM »
Thanks @bacchi ! I'm not from the US so I'm not familiar with how certain things work over there.

In that case: no point in doing this, especially not because you need to pay extra fees. You're basically just making extra payments and if that's something you want to do in the future you can already do that for free.

Mr. Metal Mustache

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Re: Bi-Monthy Payments. Trick or Treat?
« Reply #11 on: November 03, 2018, 06:13:53 PM »
I get it as well. Hah. If anything the bank potentially holds the money and gets interest on it before they even apply it. Thanks for explaining it Bacchi.