Essentially, a mortgage is a legal agreement between a lender and a debtor.
The lender lends money at a particular interest to the debtor in exchange of debtor’s property that holds more value than the loan given.
After the complete payment of the loan, the property is returned back to the debtor.
This process of paying in fixed installments at a particular rate of interest over an assurance of property is also known as amortization.
Mortgage payments are popular with students pursuing scholarships in renowned universities and, young entrepreneurs who have envisioned a successful expansion of their business ventures. To get a mortgage, the borrower or the debtor must make a down payment which is a certain percentage (say 20%) of the loan amount that is asked for. However, there are different strategies employed in mortgage payment plans.
One of the strategies that has been gaining popularity is a biweekly mortgage plan. How does a biweekly mortgage plan gain an upper hand over the traditional mortgage payment plan? Before that, it is important to understand what a traditional mortgage plan is, and how many types of mortgage plans exist for debtors. Of the many ways of paying off your mortgage, fixed rate plan and, adjustable rate plans are used predominantly.
In fixed rate mortgage plan, the interest rate is constant through the mortgage period. People buying homes or, investing in new business ventures resort to fixed rate plans. In adjustable rate mortgage plan, there are fluctuations in interest rates that reflect in the mortgage payments.
And then, there are reverse mortgages, balloon mortgages and Interest only mortgages too. Every mortgage plan is designed as per the financial sustainability of the individual. So, it is crucial for the debtor to thoroughly understand a mortgage plan before executing it.
Every mortgage payment comprises of principal, interest, tax and insurance. The property tax and the insurance on the property that is mortgaged stays constant. Therefore, the variables in the mortgage payment equation are the principal and the interest.
So, what is a biweekly mortgage plan payment? Is it a fact that one pays lesser interest in a bi weekly mortgage plan as compared to the traditional monthly plan? To understand how a bi weekly mortgage works, one must know what it exactly is. A plan in which, the debtor makes a half payment of the actual monthly payment which is, once in two weeks instead of making the whole monthly payment is known as Biweekly mortgage payment plan.
Biweekly mortgage payments are also known as bimonthly mortgage payments. For instance, if you are paying off a 30 year mortgage loan of about $100,000 at a 6.5% interest rate, a monthly loan payment comes down to $923.73, with the home insurance and tax coverage. However, if you choose to pay the mortgage loan bi monthly or bi weekly, the amount that is to be paid twice a month totals up to $461.87.
Although a biweekly mortgage payment is not recognized by the government on record, there are banks, third party handlers and mortgage companies that do offer the option of biweekly mortgage payments. In this method, the debtor pays biweekly instalments i.e twice a month, rather than making the payment once a month.
A biweekly payment schedule would include 26 payments in 52 weeks of the year. However, biweekly mortgage payments are computed according to the principal amount, the length of mortgage period and the annual interest rate. Now, how is the biweekly mortgage amount calculated?
Example: You have applied for a loan of $100000 for a 30 year time period for an interest rate of 6.5% i.e 0.065.
Now, the total biweekly mortgage payment is calculated as (R/26)PI/(I-1)
So, for a loan amount of $100000, a biweekly payment amount is :
(0.065/26) x 100000 x (7.0116/(7.0116 -1)) = $291.58
If you want to know the total interest paid over the course of 30 years as biweekly mortgage interest plan, then the total interest compounded over the mortgage time line is :
= (291.58 x 780) -100000 = $127432.4
A Bi weekly payment calculator aids in calculation of bi monthly or monthly payment, depending on the debtor’s financial capacity of repaying the mortgage. In case, you are buying a car, then you need to quote the purchase price. If you are buying a property, you must quote the property value as quotation.
The calculator needs the below inputs:
|Total Value of Investment|
Down Payment as Percentage/Amount
Loan to be sought
|Mortgage loan for the investment|
Annual Rate of Interest
Mortgage loan period
In a traditional mortgage payment, the debtor is expected to make 12 payments per year. However, by the schedule of a biweekly mortgage payment plan, the debtor is expected to pay 26 half payments.
Now, biweekly mortgage companies use this payment plan to their benefits by charging interest on a per diem basis. The advantage for these biweekly mortgage companies is, they are entitled to a collection of additional bi weekly interest per year. However, the question stands – How advantageous are biweekly mortgage payments?
There is a general assumption about biweekly mortgage payment plan, that a part of it covers the interest and the other covers the principal loan amount. However, this assumption is incorrect. Rather, the biweekly mortgage companies hold the mortgage payment until the month is over and then, apply the interest rate to the whole amount.
However, this plan has a hidden advantage too. Since in a biweekly plan, the debtor ends up making 26 half payments (equivalent to 13 full payments) per year, the mortgage loan can be repaid back faster by at least 4-6 years.
These days, many people are going through the self managed biweekly mortgage payment plans rather than, opting for the bank managed ones or, being handled by a third party. In a self managed biweekly plan, whatever amount is being paid in a biweekly fashion is added to the regular monthly mortgage payment.
So if monthly mortgage payment is say $1000, the debtor pays an amount of $1100 per month, by adding the extra $100. Now, the debtor is overpaying the regular mortgage by $1100 annually which can be considered the 13th payment.
Now, banks, mortgage companies and third party lenders do not take the 13th payment into consideration until the financial year is complete. However, in a self managed biweekly mortgage payment plan, the debtor has the luxury of not being financially obliged to pay the bank or the mortgage company in the stipulated time. For instance, the debtor can issue a check for the extra payment and, can skip it in the subsequent next.
Bi weekly mortgage plans are best for home owners and, people who undertake auto loans. Some of the benefits in undertaking the plan are:
Undertaking a mortgage loan depends on various factors that are entwined with the debtor’s financial foundation.
Choosing a bi weekly mortgage payment plan depends not only on the value of property that is mortgaged but also, depends on your paying ability. Your monthly income must ensure that.
When investing in a new purchase through mortgage payment plan, a debtor must understand that a greater percentage of his monthly or biweekly payment goes to the principal amount. A minimum percentage of it is reserved for the interest. Only tangible assets can be used as assurance when, a debtor applies for mortgage loan.
To avail tax deductions, the IRS (Internal Revenue Services) provides exempt on certain amortized expenses that cover fields like bond premiums, research and development and, investment in lease acquisitions.
Apart from the tangible ones, certain intangible assets like copyrights, trademarks and patents also are covered under the exempt category. To avail the deductions on the amortization costs, the debtors must complete Part VI of Form 4563.
Before following a mortgage payment plan, a debtor must be aware of what kind of assets can be mortgaged. Basically, there are two types of assets : Tangible and Non tangible assets.
All tangible assets are eligible for mortgage plans. They include properties like homes and automobiles, factories and, heavy or light machinery. In case of mortgaging machinery, the debtor must ensure that it is registered. For mortgages that are paid off in lesser number of years, assets like gold and silver Jewellery, costly artifacts and, family heirlooms are also used a means of assurance.
Intangible assets like stocks and bonds, copyrights and patents also fill the criteria when applying for mortgage loan. Although bi weekly mortgage loan payments differ from the conventional monthly mortgage payment, there is not much difference if you are aiming for a short term loan repayment period. But, if you are paying off a mortgage for a longer duration, you might as well undertake a bi weekly mortgage payment plan.
A bi weekly mortgage payment plan enables you in not only building equity steadily but also, aids in faster payment of the loan faster by at least four to 6 years. Say, if the time period is 30 years, paying off your mortgage is possible in approximately 24 years! So, whenever you apply for a mortgage loan, make sure you are aware of the subtle differences between the monthly and the bi weekly mortgage payment methods. At the end of the day, your meticulous financial planning can alone help you in building equity not only faster but large too.