Written By: Glenn Michaels
Typically mortgage payments are calculated on a monthly basis and a borrower is scheduled to make twelve (12) mortgage payments a year. However, borrowers that sign up for a Bi – weekly mortgage are scheduled to make thirteen (13) mortgage payments a year.
Need Mortgage Training? CLICK HERE to Download Brochure --->>
Every mortgage has a specified interest rate that has a corresponding interest rate factor. The interest rate factor is always multiplied against the unpaid principal balance to determine the interest allocation for the month.
If a borrower make thirteen (13) payments a chunk of funds will be applied to principal reduction and that interest rate factor will be applied against a lower unpaid principal balance thereby increasing the principal reduction and lowering the interest allocation for the month.
Most bi – weekly loans the thirteenth (13th) payment is allocated to principal reduction and the scheduled mortgage will be reach maturity at faster pace than if a borrower paid their mortgage the traditional way, twelve (12) mortgage payments. If a borrower pays on a bi – weekly basis their balance will be brought to maturity at a quicker pace than a borrower paying the traditional way.
A borrower who takes out a $300,000.00 mortgage at 5% for thirty (30) years has a monthly principal and interest payment of $1,610.46 plus escrow for taxes and insurance. The interest rate factor for a 5% mortgage loan is .0041666%. Each month the unpaid principal balance is multiplied by the interest rate factor to determine the interest allocation of the mortgage payment. Below are two examples, one is for a borrower paying twelve payments annually and one if for a borrower paying thirteen payments annually. The principal reduction moves more rapidly for a bi – weekly payer.
The principal allocation increased $6.50 by receiving the lump sum of $805.23 towards principal. Prior to the lump sum the principal allocation was increasing about $1.57 monthly. This shows an accelerated principal reduction an obviously the mortgage balance will go down at a faster speed than scheduled.
If a borrower is disciplined he could accomplish the same thing by paying $100.00 a month towards principal reduction. In addition if a borrower does not have the half payment in the bank as required in a bi – weekly mortgage the borrower can skip the principal reduction any particular month and still accomplish his goal of paying off the mortgage early.
Need Mortgage Training? CLICK HERE to Download Brochure --->>
If a borrower pays $100.00 towards principal reduction each and every month for the first twelve (12) months the unpaid principal balance will come out more favorable without putting a squeeze on a borrower’s budget.
About The Author
Glenn Michaels - As an NAMP® staff writer, Glenn Michaels is a mortgage underwriting instructor for Mortgage Underwriter University (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
