So, to continue the last post...
Understanding the reasons behind a refinance are of the most critical importance. Keep it in the forefront of your mind why you are doing it, otherwise you will continue in the vicious cycle of refinancing every 2-5 years so that you can free up a bit of money, and before you know it you'll be 60 years old wondering how come you still have thirty years left on your mortgage!
One thing you get offered by mortgage companies is the option to set up a biweekly program. Paying your mortgage payment biweekly can be a great option, especially if you get paid every two weeks. The point of doing so is to pay a thirty year mortgage down in 25-26 years. Why not cut off 4-5 years right?
Here's the part you need to watch for. Most mortgage companies charge you a set up fee for this biweekly service. I have seen anywhere from $100 - a full month's mortgage payment. Either you pay that set up fee out of your pocket or they gladly attach it to the end of your loan for which you will undoubtedly pay interest dollars. After the set up fee, you may also incur a "per payment" or "draft" fee to help them offset their costs of drafting out of your account automatically. Sometimes this fee is anywhere between $1-$4 per payment.
All this happens so that you can pay your home off in 4-5 years less. Well, as good of an idea as that is, does it really make sense to pay those up front fees? NO! N-O, absolutely not. All that you have to do is basically make an extra payment per year to accomplish the same goal.
See, paying biweekly means you are making 26 payments in a year (52 weeks in a year, pay ever other week, so divide that by 2 and you get 26). Or 13 full monthly payments in that year (Divide 26 by 2). So, how can you still accomplish the awesome goal of paying your home down early (which in the long term costs you much less interest dollars) and avoid all the set up fees that banks may charge you for the biweekly program? Here are a few tips:
1. Begin sending in half payments every two weeks (Before you officially begin this practise I would call your bank and verify that they would accept such an arrangement from you. Be careful though, they'll just try to set you up on their biweekly program and then enlist those fees upon you.)
2. Set up an automatic draft from your checking account into your savings account for your full monthly payment divided by twelve. Once you reach that full payment amount in your savings, send that money in each year. (So if your monthly mortgage payment amount is $1,200; have $100 draft out of your checking into your savings every month. At the end of 12 months you will have accumulated $1,200. Send in that extra payment every year and you will achieve the same results as a biweekly payment, give or take a few months).
3. Find a company that does not charge any fees for their biweekly plan. Sometimes we feel that we wouldn't be motivated enough to do this on our own. That would be quite sad, but at least in the start having something set up would be better than not at all. So find a company that would set you up on a biweekly program without the fees. You see the disclosure forms, so take the time to read them before you sign. Don't just take some one's word for it (even the Mortgage Broker!) -- Note this step might be a little tougher than you think. I personally know of ONE company that not only doesn't charge you a set up fee and a draft fee, but they also give you a .25% off of your rate for setting it up. ONE, so HEAVY research is needed for this step to truly be successful.
At the end of the day, any step you wisely take toward paying off your debt sooner is a step in the right direction. One day at a time!
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