Why You Shouldn't Use Your Lender's Biweekly Mortgage Payment Scheme
Gotta love the interwebs! It's full of all kinds of information, some good and some bad but this is a great article about why it's best to avoid putting your mortgage on a bi-weekly payment plan.
Original Article from lifehacker.com:
By Melanie Pinola
Paying your mortgage every two weeks instead of monthly could save you tons of money in interest and shave years off your mortgage. However, if your lender offers a payment plan for doing this, you should probably skip it and set it up yourself. Here's why.
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David Shamansky writes on the Active Rain (Trulia) blog that unless your lender actually services your loan, it's a third party that handles these payments. You might be under the impression that your balance is reducing every two weeks, but:
"The 3rd party service debits your account every 2 weeks and THEY sit on your money and make interest (on top of whatever they charged you to set up the service). At the end of each 2 week debit period they now have a full payment and apply that to your lender (if they are at least this honest, as I have heard some very bad horror stories) and after a period of 6 months they finally have a complete 1/2 payment debited (so 3 total prior to this payment due date) to add to your normal payment to apply to principle reduction and that saves you some interest. Once the next 6 months passes the other 1/2 payment has been taken from your account and now you have what you were told 13 payments made during a 12 month period.
Here is the secret...
Your interest is calculated by taking your outstanding balance times your interest rate, so if your balance is only seeing the additional principle reduction 2 times /yr and not 26, as they make you believe, your savings is far less than it could be!"
Send in your own extra payment—Shamansky recommends dividing your monthly payment by 12 and marking that amount on your payment as "apply to principal"—and you will further reduce your interest and pay off your loan faster. And it doesn't cost you one cent.
Not everyone agrees about paying off your mortgage early, but this is another case where DIY rules.