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How Bi-Weekly
Payments Can
Pay off Your Mortgage Faster
by Lee Masterson
Biweekly (or fortnightly) payments seem to be the fad of
the moment. Everyone's talking about how great they can
be for paying yourn mortgage off faster. Some companies
are even charging exorbitant fees to show you how good
they can be for reducing your debt.
But do you know why they're such a good idea?
Did you know there's also a trap some banks can set for
your bi-weekly payments that seriously STOP
you from getting ahead?
We're going to look at some of the good and bad points of
biweekly (fortnightly) repayments and how they really can
help you save thousands of dollars.
How the BiWeekly Method
Works
Before we start trying to alter payments or avoid bank
traps, it's a good idea to understand how and why
fortnightly payments work.
Let's look at a simple example:
If your mortgage payment was $1,000 per month - then you
would pay 12 payments per year, which is
$12,000 per year. Easy, right?
Let's say you decided to pay half your
mortgage payment ($500) twice a month, then you would pay
24 payments per year, which still adds
up to $12,000 per year.
Okay - instead of opting to pay once a month or even
twice a month, let's say you decided to pay half of your
mortgage payment every second Thursday (or on the same
day every second week), then by the end of the year you
would have made 26 - not 24 - payments
of $500 - which is $13,000 per year . That's one extra
payment per year coming off the amount you owe on your
mortgage.
No matter what loan amount, if you work out your
repayments this way, it will always come out as one extra
payment per year.
The reason this works is because not every month has
exactly 28 days in it. Grab a calendar and count how many
Thursdays you see. Most months will have four. Some
months will have five Thursdays (usually two months every
year). The same should work for any day of the week you
choose.
Does it Work Every Time?
Let's look at an example mortgage. (We'll base this on
$250,000 at 6.5% over 30 years). Our minimum repayment
for this mortgage is $1,580.17 per month. Over 12 months,
we would have paid $18,962.04.
Now let's cut the monthly figure in half. We will now pay
$790.08 per fortnight (biweekly). If you pay the half
monthly figure every second week for a year, you get:
$790.08 x 26 fortnights = $20,542.08
(did you notice that it's still exactly one extra payment
per year?
$20,542.08 - $18,962.04 = $1,580.17)
So - if I put this new repayment amount into our mortgage
calculator,
it tells me that I could pay my loan off in 24.2
years - that's almost 6 years off the loan term - and I
could save $72,710 in interest, just by
paying biweekly instead of monthly!
Every Cent Counts
In another article, we showed how and why every cent
counts.
Let's see what kind of difference rounding up our minimum
fortnightly payment by a few cents can make.
Minimum fortnightly (biweekly) payment = $790.08
Let's round this figure up and pay an even $800 per
fortnight. That's only $9.92 per fortnight extra.
Everyone should be able to afford an extra $9.92 a
fortnight - gee, that's only 0.70 cents per day!
Now we have the double benefit of paying biweekly
payments, plus adding a few cents to the payment amount.
According to our mortgage
calculator,
your new loan term should be 23.4 years
and you should have saved $81,200 in
interest over the term of the loan.
Every cent really DOES help, doesn't it?
What
Could Go Wrong?
Of course, anything that looks too good to be true
usually is - and the biweekly system is not much
different. Yes there are some things that can go wrong.
Click Here
to see more details about the tricks and traps of
biweekly payments.
Lee
Masterson is a freelance writer from South Australia and
is one of the founders of MortgageLoanHints.com. She has
worked in banking and finance for more than 10 years and
now spends much of her time trying to help people control
and manage their debt. You can find more of Lee's
articles here: http://www.mortgageloanhints.com
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