Quote:
Originally Posted by GP_Matt
I have always felt that the biweekly payment plan was just a marketing gimmick. The savings from paying biweekly is about $3000 savings over 25 years which for me is not enough to base a decision on. The real savings ($37560.03 in my example)come from the bi-weekly accelerated. But the savings are because they calculate your payments based on 24 a year and then add two. In my example you spend an extra $1744.82 a year but are done your mortgage after 21.4 years instead of 25. That is no longer a 25 year mortgage then, it is a 21.4 year mortgage.
Banks always push it as if it is some accounting trick that will save you money when it is nothing more than increasing your payments to pay off the loan quicker. Why not just sign a 20 year mortgage.
I ran the numbers on a $300 000 loan at 5% interest over 25 years and below is the total interest payment over 25 years and term. At lower interest rates the numbers are closer together and the spread increases as interest goes up.
Monthly - $223,443.02
Bi-weekly - $220,571.04
Bi-weekly Accelerates - $185,882.99
/end rant
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You sir, have tapped into what "the 99%" don't get - Well done. There is no free lunch: All these accelerated payment plans do is reduce the time period of your mortgage. So an accelerated bi-weekly, as you mentioned, simply increases your payments per year to mimic the same cash out the door as if you'd signed a ~21 year mortgage. You didn't save money or reduce the interest, you just reduced the amortization period of your mortgage.
What most people don't take advantage of is the fact that 90+% of mortgages allow you to make 2x the payment every month and a 10% lump sum payment every year. What's great about this is any amount you make over the normal payment goes straight to the principal, so you'll do a lot of damage to the interest over the life of the mortgage by doing that!
This gives you the flexibility to put, say, your bonus towards the principal every year, giving you huge bang for your buck.