Why I Don’t Like Bi-Weekly Mortgages…..

Since it’s only Thursday and I’ve had four people ask me about whether they should take advantage of a bi-weekly mortgage plan and I surprised all four of them with my answer, I thought I’d share with you why I don’t like bi-weekly mortgages.

First, let me explain the concept of a bi-weekly mortgage and how it works.   Let’s say that you’ve got a $100,000 mortgage at 6% and your minimum payment is $599.55 (let’s round it to $600 for example purposes.)

The way a bi-weekly mortgage works is that you would pay $300 every two weeks (a half of a payment) and that means that over the course of 12 months, you’d make 26 half payments (or 13 full payments.)   That means that over the life of the loan, you’ll pay the loan off 5.5 years faster.   That will save you $24,700 in interest.

So what’s not to like about that?  Saving $24,700 is a very good thing!

But there are a couple of things I don’t like about a bi-weekly mortgage and then I’ll show you what I call “The Better Way:”

• With a bi-weekly payment program, the half payment comes out of your account every two weeks, but it doesn’t get applied to your mortgage until the end of the month.   So let’s say that your two half payments are scheduled to come out on the 10th and the 24th of the month.    Your money ends up sitting in a different account (controlled by your mortgage payment servicer) and then applied to the loan at month end.    Every single “bi-weekly” plan that I’ve ever seen operates that way.   How do I know?  I’ve personally investigated some and I know that the mortgage servicing computer platforms are set up so that they have to recognize a complete payment every month otherwise it gets flagged as delinquent.   Don’t believe me, ask your bank if you can bring them 1/3 of your mortgage payment in cash every week for three weeks.    See what they say.    It’s a personal thing, but I don’t like having my money sitting in someone else’s account.
• Fees – You will probably find people who will disagree with me, and they are probably hidden quite well, but there are fees involved.    Typically, there’s an up front set up fee and a small monthly fee.

The Better Way:

The principal behind the bi-weekly is good, but I recommend that you do it one of two ways instead:

• Take your payment, divide it by 12 and add that much extra on to your payment every month.    You experience the same savings without the fees and your money stays in your account.
• If your income is “variable” (bonuses, etc.) commit to making 1 house payment out of your bonuses every time you get a bonus.  I have a customer who got 20% of his income in a December 31 bonus.   Every year, he made three house payments on December 31. 

Is the bi-weekly plan better than taking 30 years to pay off the mortgage?   Absolutely.   Is there a better way?    I believe there is.

Hope that helps enlighten you on my feelings on the matter……..

It’s Different This Time…..

Don Peck from the Atlantic Magazine has a rather sobering analysis of the current economic conditions and how it’s different this time than it has been the last few.

We’ve been saying on here that there is a seismic shift going on in consumer thinking and spending.  What he has to say reaffirms that view.

Well worth the read, but don’t read it late at night…….

……The Long Road Ahead

SINCE LAST SPRING, when fears of economic apocalypse began to ebb, we’ve been treated to an alphabet soup of predictions about the recovery. Various economists have suggested that it might look like a V (a strong and rapid rebound), a U (slower), a W (reflecting the possibility of a double-dip recession), or, most alarming, an L (no recovery in demand or jobs for years: a lost decade). This summer, with all the good letters already taken, the former labor secretary Robert Reich wrote on his blog that the recovery might actually be shaped like an X (the imagery is elusive, but Reich’s argument was that there can be no recovery until we find an entirely new model of economic growth).

No one knows what shape the recovery will take. The economy grew at an annual rate of 2.2 percent in the third quarter of last year, the first increase since the second quarter of 2008. If economic growth continues to pick up, substantial job growth will eventually follow. But there are many reasons to doubt the durability of the economic turnaround, and the speed with which jobs will return……

Read the whole article here……

Real Estate Owned by the Three “F”

This chart is courtesy of Calculated Risk.

A few thoughts of mine below the chart……

Okay, a couple of thoughts:

• One can argue all you want about statistical noise, about how the housing crisis is getting better, but when you look at a chart like this, it clearly shows that the three “F”s (Fannie, Freddie and FHA) are seeing growing inventories of real estate owned.
• When you combine that with the chart from JP Morgan which shows serious delinquencies rising, it doesn’t paint a pretty picture.

Expect continuing losses at the three “F” and continued pressure on home prices.   More in the harder hit areas, but on a national basis as well, I’m afraid.

Financial Reform – Hello?

I’ve really come to appreciate Jon Stewart’s irreverent take on the issues in the financial world……

The Fed – Translated….

So what does it all mean for the mortgage world?  A couple of thoughts:

• The largest buyer of mortgage backed securities is leaving the market in 15 days.   (And they really really mean it this time!)  That’s not going to be without an impact on the mortgage rate markets.    According to the analysts that I’ve read and heard, the predictions range from .25% in the first 30 days to a gradual increase of 1% or more over the next 18 to 24 months.
• It shows an analysis of the economy that is mixed.   There are parts that have improved since January but parts that haven’t.

We aren’t out of the woods yet…….

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