So you just got your mortgage and saved some money or moved into your new home, CONGRATULATIONS! What typically happens in the next 1-2 months? A letter arrives talking about Bi-Weekly payments and how you can get out of debt and save tens of thousands in interest and payments by utilizing this service they provide.
Most homeowners are always interested in financial tips and tricks to save them money and there are a lot who choose this option. I mean seriously, if you are told you can save 10,000+ by having your payments applied to your mortgage every 2 weeks instead of 1 time each month who would at least be curious, right?
Here is some insider information about this that I think will open your eyes...
First let me start with this little known fact... unless it has happened recently I am only aware of 1 bank that actually has a system to be able to APPLY your 1/2 payment every 2 weeks to your loan!
So your next question might be "how can a company advertise something that is not truthful or accurate"?
Well it happens everyday but to explain, here is how it works... By utilizing the fact that all months except for February have about 2-3 extra days in them by the time you complete a year making 26 1/2 payments actually totals 13 normal full payments and thereby you have actually applied an extra payment directly to your principle! Yes you still paid the extra payment, so there is NO magic, but that is a great thing and that will in fact save you money, reduce your balance, and give you a benefit!
So with all that said what is the problem, right?
The problem is these companies pitch you under the impression your balance is reducing every 2 weeks and that is simply NOT true! First of all, they cant even apply your 1/2 payment every 2 weeks unless they actually service your loan! Since almost all US Lenders do not have systems to handle that pay model here is how it happens...
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.
Again what is the problem, right?
The problem is YOU can do the same thing, and even better for you for FREE and save even more by doing it yourself!
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!
To maximize your savings under this same model, simply take your monthly payment and divide it by 12. Then take that number and ADD it to your normal payment and mark it as APPLY TO PRINCIPLE, to ensure the lender applies it to your balance and NOT your escrow account.
By doing this simple change, what happens is your balance is ACTUALLY reducing 12 times / yr instead of only 2 and that WILL reduce your interest paid even further and pay off your loan faster and still keeps you in control of your money if you ever decide to change it and BEST OF ALL... ITS FREE!!!
If you are looking for additional money saving tips and financial secrets stay tuned I have more on the way.
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