Viable options for mortgage payments


July 04, 1999

Dear Mr. Azrael:

What are the disadvantages to a bimonthly mortgage for people with ordinary good credit?

Winifred Krimmel, Pikesville

Dear Mrs. Krimmel:

Two popular options today for residential mortgages are "biweekly payments" and "no escrows." What are the advantages and disadvantages of these features?

Biweekly payments are designed to make regular prepayments on your mortgage debt. You make one-half of your mortgage payment every two weeks, instead of making a full mortgage payment once a month.

In effect, you will be making one extra mortgage payment per year while hardly noticing the additional cash outflow. But, you will likely notice the increased cash flow that will occur when you pay off your mortgage ahead of schedule.

By paying biweekly, a $100,000 loan at 7 percent interest for 15 years will terminate in 158 months, instead of 180 months. You will pay about $4,800 less interest over the term of the loan.

"Not all lenders offer biweekly mortgage payments," according to Nicolette Heslen, a NationsBank mortgage specialist, who notes that her bank does have a biweekly payment program.

Borrowers with monthly payment plans may find that many lenders will not accept payments every two weeks since they do not meet the minimum payment.

To work around this hurdle, you can pay an extra one-twelfth of your monthly payment every month. You pay your minimum payment every month and that extra one-twelfth payment means you pay the same amount to the lender each year as you would with a biweekly schedule.

Instead of making biweekly mortgage payments, you might be wiser to use the extra payment to reduce higher-interest debt, such as credit cards or car loans.

You could also invest the extra payment and possibly earn a return greater than your mortgage interest rate.

The "no escrow" plans allow you to avoid paying one-twelfth of the annual real estate taxes and homeowner's insurance to the mortgage company. Instead, you pay the tax and insurance bills directly when they become due.

The advantage of a "no escrow" plan is a lower monthly mortgage payment, consisting only of interest and principal.

You may be disciplined enough to invest the one-twelfth of the real estate taxes and insurance in an interest-bearing savings account each month, so you will have funds to make the lump-sum payment when you receive the bills.

Otherwise, you will have to pay the taxes and insurance from other funds.

Many lenders that provide "no escrow" loans require the borrower to submit proof that the real estate taxes and insurance have been paid.

There are some lenders who charge a slightly higher rate for "no escrow" loans.

When considering a "no escrow" option, shop carefully and make sure no premium is being charged, as this will likely offset any savings.

Pub Date: 7/04/99

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