Author Topic: Bi-Monthly Mortgage Payments?  (Read 5292 times)

BlastinNRelaxin

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Bi-Monthly Mortgage Payments?
« on: May 21, 2015, 01:22:08 PM »
Can anyone describe the benefits besides shaving several years off of your mortgage? is this a good option?

I ask since I just purchased a Condo 2bd/2bth and rented the second room to a friend. The mortgage is a total of $377k and I would shave about 5yrs off the mortgage by paying bi-monthly instead of one payment monthly. This seems like a great idea, but I am always weary of a "Great Idea". Please put my unease to rest. Thank you.
« Last Edit: May 21, 2015, 01:26:58 PM by BlastinNRelaxin »

zephyr911

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Re: Bi-Monthly Mortgage Payments?
« Reply #1 on: May 21, 2015, 01:29:01 PM »
It's an easy way to accelerate your payoff, and it's extra great if you can match it up to your pay schedule.
Don't ever pay extra fees to do this, though. Some banks will try to get you there.

Random Hangers

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Re: Bi-Monthly Mortgage Payments?
« Reply #2 on: May 21, 2015, 01:48:36 PM »
We refinanced to a bi-monthly, 20-year mortgage in November 2013. So far it's been great. If I'm remembering the paperwork correctly, it brings it down to a 17-year loan. We haven't had any weird issues come up (confirmed up front there would be no fees), if that helps put your mind at ease.

(Prior to that, we had a 30-year mortgage that we just made one extra payment on once a year, typically when I received my work bonus. This is the same except that I don't have to manually make the payment; it's just debited out of our account automatically).

Hope that helps!

theoverlook

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Re: Bi-Monthly Mortgage Payments?
« Reply #3 on: May 21, 2015, 02:09:30 PM »
When I was 22 and dumb I paid $370 to sign up for a bi-monthly program.  It worked fine but there was no need for the fee - I could have easily sent an extra payment in manually.  Then again they have me a 1/4 point deduction on my rate for it so maybe it was worth it - I probably saved enough in 10 years to offset the fee.

But don't pay it nowadays, it should be free.  If they charge for it, set the extra annual payment up yourself using your online banking.

kib

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Re: Bi-Monthly Mortgage Payments?
« Reply #4 on: May 21, 2015, 04:42:42 PM »
I think the difference between a  twice-monthly set-up and sending extra principal payments is that the twice--monthly is actually two payments of principal and interest that equal up to what you would have paid anyway, it's just split, so you're paying less interest by making half your monthly payment two weeks early. (depending on how it's structured you may also be making 26 half payments instead of 12 full ones, further decreasing the balance.)  Making a principal-only extra contribution saves more in the long run, but it also increases what you pay in a month.  E.g. if you have a twice-monthly, you're sending in two payments of $320 each, but if you have a standard monthly payment you pay $640 plus whatever extra you choose to send.  To repeat myself, sending extra principal is better for paying off the mortgage, but twice-monthly is still better than nothing.

ETA:   those fees!   Convenient holdover excuse from the days when those extra payments had to be processed by hand.  Loada rubbish!

-- I once sold a house OWC to a sweet young couple who were so enthused when I said the rate was 8% and the payment was $1210 a month.  He bent over the calculator for a minute and grinned. "That means we'll be paid off in 12 years!"  ???  They thought I was the scam artist of the year when I told them no, 8% is not a one-time fee, it's the annual cost of the loan.  Ouch.  I guess you don't know til you know.
« Last Edit: May 21, 2015, 05:15:41 PM by frufrau »

La Bibliotecaria Feroz

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Re: Bi-Monthly Mortgage Payments?
« Reply #5 on: May 21, 2015, 04:49:43 PM »
Yeah, it's silly to pay a fee. If you are paid biweekly, then in the months when you get an extra check, just make a big extra payment (depending, of course, on your other investment goals).

BlastinNRelaxin

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Re: Bi-Monthly Mortgage Payments?
« Reply #6 on: May 26, 2015, 01:05:53 PM »
Thank you all for supplying me with a good collection of opinions on this. I decided to go with the bi-monthly.

willkp23

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Re: Bi-Monthly Mortgage Payments?
« Reply #7 on: May 26, 2015, 01:34:47 PM »
I always built my savings up to about 10k (emergency fund), then I slammed my mortgage with 5k chunks about every 6 months to a year depending on what came up.   I also refinanced my mortgage to a 10 year.   That on top of paying extra when I got a raise, it didn't take long to be paid off.   Took me about 7 years.   

forummm

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Re: Bi-Monthly Mortgage Payments?
« Reply #8 on: May 26, 2015, 02:07:37 PM »
Depending on your mortgage contract, paying 2x per month won't actually cut your interest for that month. The interest is calculated in relationship to the due date, and paying early won't change that. You can make extra principal payments (often only with your normal mortgage payment) and that will lower *future* interest accrual, but the interest is accrued in arrears.

arebelspy

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Re: Bi-Monthly Mortgage Payments?
« Reply #9 on: May 26, 2015, 03:39:43 PM »
Depending on your mortgage contract, paying 2x per month won't actually cut your interest for that month. The interest is calculated in relationship to the due date, and paying early won't change that. You can make extra principal payments (often only with your normal mortgage payment) and that will lower *future* interest accrual, but the interest is accrued in arrears.

And even if it does, you may want to look into the various discussions on the forum for why many don't think prepaying a mortgage is a good idea (versus investing).  :)
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wotan

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Re: Bi-Monthly Mortgage Payments?
« Reply #10 on: May 30, 2015, 06:20:24 AM »
a bi-monthly mortgage will not save anything off a mortgage. if you set up payments for every 2 weeks you will. bi-monthy =24 payments. paying every 2 weeks=26 payments. certainly worth it if you can do it

NoNonsenseLandlord

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Re: Bi-Monthly Mortgage Payments?
« Reply #11 on: May 30, 2015, 07:53:45 AM »
I paid off 5 buildings, I like the idea.  A guaranteed return, enough cash flow to leave the cube farm.

look at the principal amount being paid on your most recent payment.  If it is like $250 being paid, paying an extra $1,000 will shorten the life of the loan by ~4 months.

Paying 24 payments, vs. 12, makes no difference if the total is the same.  Amortized monthly payments do not reduce payments by paying two weeks early.  Build equity, get a HELOC, and use the HELOC for investing.

arebelspy

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Re: Bi-Monthly Mortgage Payments?
« Reply #12 on: May 30, 2015, 08:20:58 AM »
Paying 24 payments, vs. 12, makes no difference if the total is the same.  Amortized monthly payments do not reduce payments by paying two weeks early.

That's not necessarily true.  Only if the lender holds the first payment and applies both at once.  Otherwise--typically--interest is calculated daily.  It obviously varies based on your loan terms, but that's fairly typical from what I've seen.
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The Fake Cheap

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Re: Bi-Monthly Mortgage Payments?
« Reply #13 on: May 30, 2015, 12:15:02 PM »
The gain from the bi weekly mortgage payments are the extra 2 payments you make per year.  The interest saved from paying biweekly is minimal.   

Wotan good catch on the difference in bi weekly semi monthly.   Also related to this, make sure your payments are the monthly payment divided by 2, and not your total yearly monthly payments divided by 26.  Ex  If your monthly mortgage principal and interest payment is $1,000, you want to pay $500 bi weekly so you get 26 x 500 payments = 13,000 per year instead of 12 x $1,000 = 12,000 per year.  If you went yearly divided by 26 you would get $12,000 / 26 = $461 (and change) for a bi weekly payment. 


forummm

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Re: Bi-Monthly Mortgage Payments?
« Reply #14 on: May 30, 2015, 06:32:47 PM »
I assumed OP meant semi-monthly or bi-weekly and just rephrased to 2x per month.

Paying 24 payments, vs. 12, makes no difference if the total is the same.  Amortized monthly payments do not reduce payments by paying two weeks early.

That's not necessarily true.  Only if the lender holds the first payment and applies both at once.  Otherwise--typically--interest is calculated daily.  It obviously varies based on your loan terms, but that's fairly typical from what I've seen.

I know you have a lot more mortgages than I do, ARS. What I've generally heard is that mortgage contracts generally do not use simple interest (what you described--interest is calculated daily based on the daily balance). Perhaps investment property mortgages are different? For what it's worth, both mortgages I've had calculate based on the payment's due date, and not based on whether you pay it early or late. So I could technically pay 15 days late every month and not have any extra interest accrue. And it does me no good to pay it 15 days early.

I've had some car loans that use simple interest (what ARS describes) and others where it doesn't matter if you pay it early.

arebelspy

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Re: Bi-Monthly Mortgage Payments?
« Reply #15 on: May 30, 2015, 06:35:39 PM »
You are correct, I looked it up and monthly accrual is more common than daily.  I am used to daily, but apparently that is less common.  My mistake, and thanks for the correction.  :)
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forummm

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Re: Bi-Monthly Mortgage Payments?
« Reply #16 on: May 30, 2015, 06:41:48 PM »
I think mortgages for primary residences are intentionally very standardized, and standardized to be very rigid, so that they can be sold and resold (and sliced and diced and repackaged and resold) on the secondary markets, with more predictable monthly revenue streams (plus/minus early payoffs and delinquencies).

a1smith

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Re: Bi-Monthly Mortgage Payments?
« Reply #17 on: May 31, 2015, 11:40:03 AM »
You are correct, I looked it up and monthly accrual is more common than daily.  I am used to daily, but apparently that is less common.  My mistake, and thanks for the correction.  :)

But at loan origination and payoff there are daily interest payments calculated to get you on and off of the monthly payment schedule.

My loan allows principal only payments at any time and they reduce principal on the date of payment.  So, for that month, the interest is calculated off of multiple principal balances.  I can also make additional payment to principal balance with the regular payment.  These are all free and can be adjusted on the bank's website.  However, my mortgage is 2.97% so I am not paying it off faster.

If the bank switches you to bi-monthly (or originates the loan that way) then the interest is calculated twice per month. However, it only saves you a tiny amount of interest over a monthly loan.  See Alternative Ways to Pay Off Your Mortgage Early for a discussion of bi-monthly and bi-weekly.  He has a spreadsheet that shows a bi-monthly loan only removes 1 2-week payment for 30 year loans less than 6%.  So, if a bank charges a fee to switch to bi-monthly all they are doing is collecting your last payment (and maybe more) ~30 years early so that they can collect the interest on that money for those years.

Extra information for you math geeks out there - this makes sense because of the fundamental theorem of calculus.  A bi-monthly mortgage is just a better approximation (twice as many time intervals) of the amount of interest you would pay with continuous payments.  Going from 360 to 720 time intervals for the integration doesn't make much difference.  Of course, continuous payments are hard to do but I have seen interest bearing accounts where they state "compounded continuously."  It is more of a marketing gimmick (and confusing to some) because the difference between compounding daily and continuously is small.

fishnfool

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Re: Bi-Monthly Mortgage Payments?
« Reply #18 on: May 31, 2015, 02:22:58 PM »
No need to be locked into bi-weekly or pay any fee's. Just make extra payment every year to the principal, same outcome!
« Last Edit: May 31, 2015, 02:26:35 PM by fishnfool »