Pay Loans Faster to Save Money

Some homeowner use biweekly payments to reduce the cost of a loan without going through the more expensive and time-consuming process of refinancing. If the prospect of saving potentially thousands of dollars on your loan sounds appealing with a little extra work on your part to make all your payments, then a biweekly plan may be a good option for you.

How does this help reduce you interest? Basically all that is at work is that you are repaying you debt faster. Because a biweekly payment consists of half a monthly payment, and because every month consists of four weeks and change, by paying twice a week rather than once a month you are paying a little extra for those couple of extra days. Some simple math can help clarify this expanation.

52/2=26 26/2=13

This equation shows that biweekly payments will be made twenty-six times a year (we divide the number of weeks in a year by the number of weeks between each payment). Bearing in mind that each payment equals half a monthly payment we see, by dividing the twenty-six payments by two to get us the number of payments it takes to equal a monthly payment, paying every two weeks gives us the equivalent of thirteen rather than twelve monthly payments – an extra two biweekly payments that we would not have made had we be paying once a month.

One can either go to one’s broker and ask to have them set up a new payment plan, or the plan can be executed independently from brokers. Generally how the lender setup works is the lender will set up an account into which you will deposit half the monthly mortgage every two weeks. At the end of each month when the mortgage payment would ordinarily be due, the lender will withdraw the payment from the account and leave any accumulated balance which ultimately becomes large enough to count as an additional monthly payment every year.

To do the same each thing yourself but avoiding the fees your lender will charge, just put the biweekly payments into a bank instead of the account that the lender would set up for you. Tell the bank to send you lender your mortgage payment every month. Making biweekly payments yourself gets rid of fees your lender would charge, and allows the money set aside to build interest. It would not do this if left in your lender’s accounts.

How Refinancing Fees Break Down

When interest rates go down, as they have in recent years, many homeowners with fixed rate mortgages begin to think about refinancing in the hope of cutting their interest rates and monthly payments. Because refinancing costs money, one cannot simply refinance every time interest rates go down to get lower monthly payments. To get a good idea of whether or not you should think about refinancing, you can compare the cost of the procedure to the length of time that is needed for your savings to cover that cost. If the payback comes in a couple of years, then the move to refinance may make sense. If not, consider waiting to see where interest rates go next. Before you can begin to make this analysis, it is helpful to understand how the costs of refinancing are broken up.

Does your lender charge prepay fees? If it does, then you will have to pay these in the process of refinancing since you have to pay off your old loan with the money from the new one. Because the prepay fee can be very large for those banks that charge it, it should be an important cost to consider before making refinance decisions.

Every time you decide to refinance there is an interest cost. When you pay off an old loan with a new one with the same scheduled pay off time that the first one had in the beginning, then you are stretching your debt out longer than if you were to have stayed with the original loan. Also each new loan must go through the same period at the beginning of high interest low principle payments that work in the lender’s favor. Even though the interest payments for a refinanced loan may be lower and you will have achieved lower monthly payments, the lower rate is unlikely to cancel out the cost of paying interest over a longer period of time.

Deed, administration, appraisal, and other fees may also contribute to refinancing costs. The second two fees can be changed if you are willing to negotiate with your lender and any third-parties involved whereas the deed aspect tends to be set.

Some banks give their borrowers the option of adding the costs of refinancing into the loan they are borrowing rather than paying the fees upfront. Sometimes lenders choose to bundle the cost of refinancing into what interest rate they charge. Other times they will put the cost on the borrower’s tab by increasing the principle that needs to be paid back.

Considering the Second Home Mortgage

You have some extra money and you are wondering what to do with it. You fantasize about how wonderful a second home would be. You run your ideas past your spouse and he or she isn’t opposed to the idea. You are ready to act.

Before you do this there are a few matters to consider. Because not all the debt is paid off on their first loan, homebuyers who take on second loans are not viewed as favorably by lenders as ones with no other debts straining their finances. The more debt the homeowner acquires, the more likely he or she is to be unable to make monthly payments by virtue of the fact that he or she has to pay more every month compared to a homeowner with only one mortgage payment. To compensate for this risk, interest rates are higher than for first mortgages.

A second home should not be purchased before you finance your first; this is a common sense way of living within your means, and will help keep you and your lender out of default trouble. Keeping you debt manageable is a useful means of preventing financial mishaps later on.

Interest on your second home mortgage can be tax deductible provided you spend the required amount of time living in this residence every year you pay interest. In short, plan to live there fourteen days a year. If you plan on renting, then this complicates how the deduction process works, but in any case, aim for fourteen days. An excellent article to read is Taxes on Vacation Homes (link: http://www.smartmoney.com/tax/homefamily/index.cfm?story=vacation) from Smart Money for an explanation of tax calculations. The article is a good starting point, though it may be wise to discuss your plans with a trained tax advisor.

To learn more about these loans, visit MortgageLoan.com for both basic loan information, plus a second home mortgage calculator to help you estimate costs.

Being financially secure enough to buy a second home does not happen for everyone. Proceed cautiously, examining where any preexisting debt lies, and from these observations make an informed decision about whether a second home is right for you. While different people have different tolerances for risk, always weigh what you have to gain versus what you have to lose before making choices about those risks. For an investment to be a good investment, it need to return something to you. What will as second home bring you? Contentment and satisfaction, or stress as a result of a tightening budget.