Biweekly mortgage can save thousands in interest charges


October 28, 1990|By ELLEN L. JAMES

Since the biweekly mortgage became popular five years ago, it's carried a certain mystique. Some have held the home loan in awe -- like a personal finance miracle.

In fact, the biweekly mortgage is nothing more than a way to trick yourself into making the equivalent of an extra monthly mortgage payment each year.

And since the extra payment is applied directly to principal, the ,, schedule lets you shave about nine years of payments off a 30-year mortgage, meanwhile sparing you thousands in interest charges by partially prepaying your loan.

The way the mortgage works, every 14 days you make a payment.The biweekly payment is roughly half of what a regular monthly payment would be on the loan.

"The biweekly is an effective means of disciplining yourself to send more money in sooner. It's basically for people who lack the will to make prepayments on their own," says Keith Gumbinger, a vice president at HSH Associates, a publisher of mortgage information.

"It's very painless and it saves the consumer a lot of money in interest," says Dallas Arthur, a vice president at Carrollton Bank of Baltimore, a local market leader for the biweekly mortgage.

Although the biweekly is offered by relatively few Maryland lenders, the loan is taking on fresh relevance in the current real estate market, realty experts report. Compared to the past, Maryland homeowners are picking up little appreciation on their properties these days. For many, making extra payments to principal has become the fastest way to build equity.

Besides, people are tending to stay in their homes longer than they once did. One reason is that it's tougher than it used to be to sell. People would rather stay put than liquidate their property at what they consider a low price.

Owning your home early could well fit with your other plans if you're a baby boomer. Many boomers look forward to owning their homes outright before the kids hit college or they retire. Even if their plans change and they decide to move, such prepayers will have more equity to tap.

Here's an example of how a biweekly saves money and builds equity quickly:

If you take a fixed-rate $100,000 mortgage at 10 percent and pay it off as a regular 30-year mortgage, you'll pay $218,620 over the term. However, if you pay it off as a biweekly, making an extra $878 payment to principal each year, you'll save $76,822 over the term. And the loan you took out in 1990 would be paid off in about 21 years rather than 30 years, freeing you to spend your capital on things other than mortgage payments.

The reason the biweekly can offer such dramatic savings is that, in lender's language, it "amortizes faster." By making early payments directly to principal, you're reducing the principal on which you're paying interest. "That way you save a ton of money on interest," says Mr. Gumbinger of HSH Associates.

What many people fail to realize is that the biweekly mortgage is simply one means of accelerating payment of mortgage principal. Anyone can make accelerated payments to principal according to a schedule that fits his financial objectives and ability to pay. And in Maryland, it's illegal for lenders to impose on borrowers any prepayment penalties.

To be sure, mortgage interest is the only significant tax deduction still available to most American consumers. But what many people for-get is that such a deduction is no more than a partial rebate on interest. What's more, the value of that deduction declined after the Tax Reform Act of 1986, which lowered most people's tax brackets.

Those who would try to talk you out of prepaying, including many financial planners, contend that your discretionary cash is better spent on investments that, at least theoretically, can yield a greater return. Still, the reality for most people is that money that would be spent on mortgage prepayment wouldn't go to other investments. More likely, it would be spent for casual purchases at the mall, dinners out or whatever.

"The biweekly is basically a forced savings plan," says Mr. Arthur of Carrollton Bank. Payments, made every two weeks, typically come directly from your checking account, sparing you the need to write frequent mortgage checks. The timing works especially well if you're paid on a biweekly basis.

So if the biweekly is such a great idea, why hasn't it caught on with more lending institutions?

Many institutions have shied from the biweekly mortgage because "it tends to reduce the institution's earnings on interest -- almost from day one," says Mr. Arthur.

Still, a lender that makes biweekly loans gets a faster rollover on its money -- meaning its mortgages pay off more quickly, allowing funds to go for origination of new loans. And in the current, competitive mortgage lending environment, offering a biweekly can be an effective marketing device to draw in customers, experts say.

The real snag for many lenders turns out to be a mere technical problem, says Anthony DeVeau, a senior vice president at Annapolis Federal, which has offered the biweekly for two years. "For most lenders, it's been a computer problem. It's very hard to set your computer to take this type of mortgage payment every 14 days," he says. "All lenders would really like to offer the biweekly as a marketing tool."

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