Once you purchase a house or have your mortgage refinanced, you will, for sure become an instant star to people who wish to offer their services for your home. This includes windows or carpet cleaners, contractors and even firms which proposes biweekly payments for your mortgage. A promise often given is the savings, by thousands of dollars, in the interest. Once you receive such an offer, you may begin junking it. The reason? You may not actually save that much.
A blog which appeared in the Business Section of Fox News explains that a biweekly payment for mortgages actually sends half payment for every two weeks, instead of one payment per month. With this payment schedule, you will end up paying unnecessary fees which can erode your savings. Likewise, as there are 52 weeks in a year, and not 48, the 26 payments actually "add up to equal one full monthly mortgage payment extra annually, "according to the blog.
Moreover, since mortgage balances are computed once a month, paying it two times a month will not bring you savings. While pre-paying reduces interest on other loans like credit cards wherein the balance is computed daily, with biweekly payments, "the entire savings comes from paying down the balance to the value of a thirteenth monthly payment each year."
Personal experts have long criticized the offer because it is something that you can do yourself. Direct extra payments, either via online or on payment coupon, can be applied to your mortgage principal, after which you may begin paying every other week. It is that simple.
The blog further reminds homebuyers that timing the payoff of the mortgage should be a part of the buyer's long-term financial plan. It should not be just an impulsive move to reduce interest payments.
"In general, you will be much better off:
taking your extra cash to make sure you have an adequate emergency fund of at least three months' worth of living costs;
saving for your big annual expenses;
paying off any higher-interest debt; and
investing for retirement, especially if you are not fully claiming any employer match in a 401(k) or similar workplace account, "the article states.
