Before I retired, in '79, the Navy paid every two weeks. I don’t recall when they changed from semimonthly, but it was several years before that, maybe in the 60’s. I thought all the services did, but I don’t know that.
Back to the OP. Your step brother is getting himself involved w/ a scam, it’s probably legal, but it’s a scam none the less. There are several permutations of this, some of them may actually be illegal, but they all cost the homeowner money, when they could pay down their mortgage principal themselves, w/o a third part getting involved. Your step brother is probably being promised a commission, based on how many suckers he can convince to go for this deal. I’d advise him to take a pass, but he likely sees big money because someone sold him a BS line. I doubt the big money will materialize.
You are thinking as if there is an enormous total pot of interest that you gradually chip away at each month. It is not like that, there is a new batch of interest each month. This amount is based off the remaining principal.
For example. You get a $50,000 loan. At 10% interest. That means in the first year you owe $5,000 a year on it. This amount is split across the 12 months, about $420 a month. In addition, you are paying some principal each month (as well as some other stuff). How much you pay in principal depends on how long the length of the loan is. Let’s pretend it starts at $50 per month.
This is true in the first month. You pay the interest as well as some principal. Then the month after, you are not paying on a $50,000 loan, because you have paid off some of the month before. Not much at all, but some. So instead of the monthly part of 10% against $50,000, it’s against $49,950. The interest payment is ever so slightly less because of that.
Your monthly payment is still the same. But a bit less of that monthly payment is needed to pay off the interest, and that little bit is going towards principal. This month instead of paying $50 in principal, you pay $50.25. (Or something like that, I’m not working out the math.)
The next month, you are paying the interest off of $48,899.50. Once again, the interest payment is a little less which means your principal is a bit more. And so on…
Notice that the effect gets a little bigger each month, the effect compounds. In the beginning you barely make any progress, most of your payment is interest. By the end of the loan, you hardly pay any interest at all and the loan goes down incredibly fast. For instance, in a 30-year loan at 10% on $50,000,
after 15 years you have paid off only $10,000! You reach the halfway point in 23.5 years out of 30!
The bank has done all the math ahead of time (it’s easier than it sounds) so that all the amounts add up and work out so you pay off the loan in the exact time they said.
Now if you pay a little extra, you pay a bit more principal. That means that every month after that, the principal base that you are paying interest against is a wee bit smaller. And which means every payment after it will take off a bit more principal than it otherwise would have. And this effect compounds.
So making extra payments pays off the loan much earlier than you would expect. That’s why a 30 year loan turns into a 23 year loan. The seven years savings, compared to the 2+ years savings you calculated is because of this compounded savings by having a smaller pile of interest to pay off each month because of the extra principal you paid off the month before.
One thing to keep in mind (forgive me if it’s been mentioned here-I didn’t see it), is that no matter how much you pre-pay, you still won the full amount of the next month’s payment. Some people believe that if you “get ahead” you can skip payments, but that isn’t the case at all. If you have a note for $200,000 and your payment is $2000 an month, if you plop down $150,000 this month, you still owe $2,000 next month.
I believe you can chose to prepay the interest, actually I know you can, which would reduce the next month’s payment by the amount of interest you paid. There is very little, if any reason to do this as it doesn’t decrease the total money you have to pay, plus you pay it sooner.
Also there is the nitpick if you prepay the entire amount then you can skip the next month’s payment 
The only bi-weekly promotions I get in the mail are from my current mortgage holder, and it’s not a refinance, it’s just a change in the billing schedule. No fee for the change. No new loan. Just a change in billing.
I think it would be a good plan if I weren’t getting paid bi-monthly (semi-monthly?). But I don’t want to deal with a month with three house payments in it if I’m getting paid twice a month. And that’s what would happen twice a year on the bi-weekly plan. Now. paying bi-monthly I’d sign up for. It wouldn’t pay off the loan any quicker, but it would make budgeting a bit easier.
Not with any of the mortgages I’ve had. Any additional payments automatically were applied to the principal. The one bank that set up an escrow account let me apply extra payments to the escrow, but none allowed prepayment of interest.
Skipping the next months payment- I’m not sure what you mean. If my payment due 8/10 is $1400 and I pay $2800 on 8/10, I still have to pay $1400 on 9/10. If I pay $1400 on 8/10 and then $1400 on 8/30, I don’t have to pay anything on 9/10, but I’m not skipping a payment- I just paid the 9/10 bill 10 days before it was due.
Yeah, bi-weekly and semi-weekly mean the same thing, now, judging by this thread.
Actually, I think we’ve screwed up the difference so much that even the dictionary describes bi-weekly as either “every two weeks” and “twice weekly.” :rolleyes:
It’s not a scam if you know how it works. There are plenty of online calculators that can assist you. Here’s an example using simple numbers to illustrate the point.
$100,000 loan @ 5.00% interest
30 Years w/Monthly Payments
=====================
* Principal= 100000
* Interest Rate= 5.00%
* Amortization Period= 30 years
* Starting month= Sep
* Starting year= 2007
* Monthly Pre-payment=
* Annual Pre-payment= $ 0.00
means this result …
* **Monthly Payment: $ 536.82**
* Total Interest:$ 93255.78(No pre-payment)
* Total Interest:$ 93255.78 (As given)
* Average Interest Each Month: $ 259.04
30 Years w/Biweekly Payments
======================
* Principal= 100000
* Interest Rate= 5.00%
* Amortization Period= 30 years BI-WEEKLY
* Starting month= Sep
* Starting year= 2007
* Monthly Pre-payment=
* Annual Pre-payment= $ 536.82
means this result …
* **Monthly Payment: $ 536.82**
* Total Interest:$ 93255.78(No pre-payment)
* Total Interest:$ 76010.27 (As given)
* **SAVINGS: $ 17245.51 Total Interest Saved, 4.75 Years shorter loan**
* Average Interest Each Month: $ 211.14
* SAVINGS: Normal Avg Int/Month : $ 259.04, You Save $ 47.90
Now using the same scenario, but with a 15-year mortgage …
15 Years w/Monthly Payments
=====================
* Principal= 100000
* Interest Rate= 5.00%
* Amortization Period= 15 years
* Starting month= Sep
* Starting year= 2007
* Monthly Pre-payment=
* Annual Pre-payment= $ 0.00
means this result …
* **Monthly Payment: $ 790.79**
* Total Interest:$ 42342.85(No pre-payment)
* Total Interest:$ 42342.85 (As given)
* Average Interest Each Month: $ 235.24
If you can afford the higher monthly payment, go for the 15-year mortgage because you will save more interest than with a 30-year monthly payment or a 30-year biweekly payment.
Of course, 30-year and 15-year mortgage rates are often different with the same loan amount. But it’s simple to calculate the savings rates.
BTW, the rates and payments were calculated using this online calculator. I would caution you to validate the above information with other online calculators, and possible spreadsheet analysis. That’s because some of the online calculators and download tools use incorrect formulas.
I get paid bi-weekly now, too. Fortunately for me, I also make more per month than I did at my last job, where I was paid semi-monthly (15th and last day).
Because of the increase in salary I was able to wrangle at my new job, not only are my individual paychecks larger, but I also get two extra checks per year (one in June, and then again in November). It’s nice to have that extra bump to come along every couple of months and pay for whatever has popped up in the interim.
I tell you this because I’m setting up for the explanation of what I think has been covered more in-depth in posts above me, but from a different angle.
By paying every two weeks instead of once a month, you effectively make one extra payment per year. This extra payment comes in the form of two half-payments that would show up in different months, just like my additional paychecks; to parallel my explanation above, that means paying extra in June and again in November.
… and of course you will shorten the length of your mortgage term if you can afford to make an extra payment per year like that. The big question is: can you afford it? I have a wife and kids to support; in my house, those two extra paychecks are pretty much already spent.
I’ve got a question on loan payments that is a little different from what’s being laid out for most mortgages, but may have some bearing.
After graduating college, I had a few student loans that I needed to pay off. The biggest was a Stafford, and that’s what I’ll focus on since that’s the one I’m remembering had this situation. It was a 10 year loan (payment and interest deferred until graduation + 1 year). I can’t remember the interest rate off-hand, but it doesn’t really bear on the question.
I was paying the minimum billed amount for a few years whilel I got rid of some credit card debt. Once that was taken care of, I decided to start throwing extra money at the student loans (let’s not get into whether this was the wisest financial choice, I decided zeroing out my debt was more important than figuring out investment options). In August, I’d get a bill stating that I owed $150 on 9/1. I mailed a check for $300 instead. Then in September, I got a bill stating I owed $150 on 11/1 (not 10/1). So by making an extra month’s worth of payments, I pushed out the next due date by one month. I continued making payments every month, sometimes the billed amount, sometimes more. Every time I paid extra, the “next due date” got pushed out further. The “pay off” amount did get reduced by a larger amount when I made extra payments, but I never thought to check whether it was by the full amount of the extra payment.
My question is: does this mean I wasn’t actually saving any interest during the time I was paying the loan? Obviously, after it was paid off, I saved on all the future interest accruals. But while the loan had a balance, were they still adding on interest as if I was still on the original payment schedule? If so, I’m guessing that it was effectively the same as making the minimum payments for that amount of time, followed by one large payment to pay it off.
This was about 4-5 years ago, but I don’t think the payment slip had an explicit “apply extra to principle” checkbox or anything. I suspect that was something I’d have had to set up with the loan holder over the phone. It’s not a big deal now, but I’m wondering whether I shot myself in the foot with how I handled it. When I bought a house a couple years back, I checked with the lender on how extra larger payments are handled (I just use my bank’s online bill pay, so I wanted to make sure that they’d apply it to the principle if I didn’t actually mail a slip with the “apply to principle” checked).
And to tie it back to the thread’s discussion, are there any mortgage lenders that handle extra payments this way (pushing back the next bill’s due date)? What kind of legalese should you look out for in the loan paperwork that would indicate how the extra money is applied?
The easiest way I can explain it is to use the following example.
If you pay an extra 1$ on your first mortgage payment, you just saved yourself the interest that 1$ would have accumulated over 30 years. This is why paying a little extra on your mortgage payments (especially early in the loan) goes a LONG way toward paying your loan off early. If you make 13 payments in your first year instead of 12, and your payments are 1500 a month, you just saved yourself 30 years of interest on 1,500 dollars, which could be anywhere from around 2k to around 5k, depending on how long the loan is and how high your interest rate is, etc.
The legalese is very simple. When negotiating your loan, make sure that overpayments are applied to the principle, NOT to the next month’s payment. Also be sure to decline any offer that includes a pre-payment penalty. Some mortgages include a penalty for paying off your mortgage early, in order to make up some of the money that they won’t be getting from interest. It’s a dirty practice, but they have to inform you about it, and they can’t lie about it if you ask them.
That’s exactly what it means. It seems that one of the terms of your loan was that overpayments were applied to the next month’s payment, not to the principle. There’s no way that you can prevent the interest charge on that type of loan.
One more random point about the extra payment. You are actually making the equivalent of **more ** than one payment a year, in terms of paying down the loan. Your normal payment is a mix of interest, principal, fees, etc. In the previous post’s example, your normal $1500 payment might be only $500 of principal payoff, but your extra $1500 payment is all principal.
On my payments, principal is about 25%. But the extra payment I make is all principal, so it has four times the effect of a normal payment.