For home mortages, what do you think of the bi-saver program? This is where you pay your mortage twice per month in smaller amounts instead of monthly. ie, pay $300 twice per month instead of $600 once per month. According to the bi-saver company, it will shorten the amount of time it takes to pay off my loan by 8 years and lower the Total Interest I pay by $21,000.
In exchange I have to pay a $5 monthly fee and make one extra mortage payment (at the bi-monthly rate, not monthly).
Sounds like a great deal for me. Is it too good to be true? It must benefit the mortage company or else they wouldn’t offer it. I don’t get it. How can it seem like such a good deal for the person who pays the mortage?
There are monthly payments. (12 payments/year)
Bi-Monthly payments. (24 payments/year)
and payments that come out Every two weeks, which is not the same as bi-monthly. (26 payments/year).
the bi-saver program will save money in interest because you are making more payments in a year. Hence, your mortgage goes down faster - you pay less interest.
The Bi-Montly payment will save you nothing, becase you are basically making the same # of payments as with monthly (the actual amount of $$ is identical), however it may be more convient if you get paid this way.
Bi-saver is OK if you can budget for the extra payments. However, I don’t think you should have to pay a fee. I was offered this option for free. I chose the single montly payment as it’s easier for me to budget for.
Monthly payments are much easier to budget for than every two week payments (how often is the payment due date on an every two-week schedule going to coincide with your payday?). If you want to save interest (and who doesn’t), divide your monthly mortgage payment by 12. Tack that amount (or double that amount, if you can afford it) onto your monthly payment, specifying that the extra money is to go toward payment of principle. You’ll pay your mortgage down just as fast that way - plus, should you ever find yourself in a financial jam you have the option of omitting the extra amount and just paying the regular mortgage payment until your financial situation improves. Can’t do that with a biweekly payment plan!
What they both said.
If youget paid every 2 weeks then the 2 week program is pretty easy to budget for. However, DO NOT PAY A FEE FOR THIS! As artemis said, you can pay extra on your own, not pay any extra fees for the privaledge of paying extra money, and have the option of not paying extra every once in a while (christmas anyone?)
These plans are not worth paying for. There is no reason you couldn’t send an extra month’s payment every year and save $60. You could also just send a payment every two weeks and achieve the same result. You are spending the $5 for the convenience of having payment coupons reflecting the bi-weekly plan.
As to whether it is a good idea I have my doubts. There is a definite attraction to paying down mortgage debt and it is an admirable goal. In a purely financial sense though it may not be the best use of your money. If you have a mortgage at 6%, and you write most of the payment off on your taxes you may have an effective interest rate of 5% or less.
If you were disciplined enough to save the money instead in something like a 401k plan you would likely make a higher long term rate of return on your investment. Sorry to muddy the waters, but that would be my two cents.
Listen to fruitbat. Here’s a bit longer explanation in case you’re not familiar with stuff like this (or other people aren’t):
When you have a debt that you must make payments on and interest is charged on the outstanding principal, then every time you pay more principal then you have to each month, you essentially make a guaranteed return of whatever the interest rate is.
So, if you owe $100 on a credit card at 21% interest and you pay off the credit card, then you have a profit of $21 on the transaction. (Notice that you have to look at the situation by starting at a time after the debt is incurred and looking at it on a going forward basis; you obviously don’t profit $21 by getting a credit card at 21% interest, charging $100, and then paying it off.)
In other words, avoiding having to pay a sum of money is the exact same thing as receiving that sum of money. (This is why you have taxable income if you are discharged from a debt).
Now, the average return in the stock market over a long period of time (20 years) for a diversified portfolio is about 11%. Interest on your mortgage is probably less than that (let’s assume it’s at 6%). If you prepay your mortgage, then you make 6%, but if you invest in the stock market, you make 11%. Prepaying the mortgage doesn’t look so hot anymore, does it? Notice that we’re not factoring in the appreciation in your house in this equation because your house appreciates at the same rate no matter whether you prepay the mortgage or not.
Plus, you have more liquidity when you invest in the stock market–you can take that money out to ransom your spouse if he gets kidnapped in a Central American country or just for whatever. You can even take the money out of the stock market to pay off your house someday if you just really get an emotional high off of paying off your house (it’ll be an expensive high, though).
You mean semi-monthly, not bi-monthly. The other posters are correct, do it yourself, don’t pay for it.
TaxGuy, what you post makes “numbers” sense, but I think there is more thatn just an emotional high from having your house paid for. While I consider my home an investment, it is also the single biggest regular expense I have. having that much moeny freed up every month would certainly allow my investment allowance to skyrocket. As always, there should be a balance. One should not pay off the mortgage without first putting some money away in a 401k or some such plan. No one wants to retire with a paid for home and no money, right? But would you ever recommend that someone with a paid for home get a mortgage? Anyway, all good advice…
I get paid every two weeks. Each payday I take approx half my mortgage payment and set it aside. When I get the full payment together I send it off. I actually round up my mortgage payment to the nearest $100, applying the balance toward principle.
So even if I haven’t made that extra payment a year (I tend to take my two “free checks” and apply them to other bills or savings) I’ve still paid extra toward the principle by the end of the year.
You absolutely do not have to pay anyone to do this for you. Do it yourself, and save the junk processing fees.
If you really want to make things easier for yourself, add an extra $100. Considering a $200000 loan at 6% fixed on 30 years, you would save about $44k in interest and pay it off almost 6 years early.
Now consider using that $100 to invest each month for 30 years:
at only a 5% rate of return, your investment would yield $83,225.86. When you consider that a more typical rate of return of 10%, you would yield $226,048.79!
These are definitely numbers that make you want to invest your money instead of pay off the mortgage.
Woops… couple of errors, but point still the same:
On the above mentioned loan ($200K, 6% fixed 30 year) you would save about $50k and pay it off almost 5.5 years early.
Plus if you consider that you’d shell out the extra $100 for only 25 years instead of 30, you would save about $59.5K on 5% return and $132.5k on 10% return.
So the differences are less, but the point is the same. Investing yields an extra $10k on the very conservative side or an extra $82.5k on the average conservative side.
The other added bonus is that if for some reason you can pull out the money you’ve invested for an emergency. Pre-paying on the loan won’t lower your payments in an emergency.