Your Mortgage : Pros and Cons of Biweekly Loans

QUESTION: What do you think of biweekly mortgages? I ask because I am considering refinancing my home and a lender I talked with was pushing biweekly loans. As she explained them, they pay off in about 20 years. But I’m not sure I like the idea of having to make loan payments every two weeks and having them withdrawn automatically from my checking account. If these loans are such a good deal, why don’t all lenders offer them?

ANSWER: Biweekly mortgages are good for lenders because they get their money back faster than with a traditional mortgage, which requires one payment each month. But most lenders don’t offer biweekly because of the difficulty programming their computers for two collections every month.

However, you can accomplish the same result by making the equivalent of 13 instead of just 12 monthly payments each year.

For example, suppose your monthly mortgage payment is $1,200. Just add $100 extra to each monthly payment and you will be making the equivalent of 13 payments each year. This should pay off your loan in 15 to 20 years, depending on the interest rate.

Biweekly mortgages are popular with blue-collar workers who get paid every two weeks. The key is that the payment is withdrawn automatically from your checking or savings account. However, for most borrowers, there doesn’t seem to be any great advantage to biweekly mortgages and it can be a bookkeeping problem to remember that the lender is going to deduct a loan payment from your checking account every two weeks.

My suggestion is to take a 30-year mortgage with monthly, rather than biweekly payments. If you wish to have it paid off rapidly so you can save thousands of dollars in interest, just pay it off as if it were a 15-year mortgage. Depending on the loan amount and interest rate, your extra payment each month will typically be between $100 and $200.

Negative Amortization ARM Could Be Risky

Q: My wife and I want to buy our first home. We found a wonderful real estate agent. The first thing he did was to get us to fill out a loan application, so he could get us prequalified for a mortgage. He tried a local S&L;, which advertised the best rates, but we discovered their borrowers must have good income and perfect credit. Although we have excellent credit, our income is not very high.

Next, the realty agent took our application to an “easy lender” who, he said, rarely turns anyone down. But all they offered us was an adjustable-rate mortgage with negative amortization. That means our monthly payment will stay reasonable, but we are not happy about the possibility that we could wind up owing more on the mortgage than we borrowed. What do you think of negative amortization mortgages?

A: As you probably already know, adjustable-rate mortgages shift the risk of rising interest rates from the lender to the borrower. To help minimize the possibility of rising payments, which the borrower cannot afford, some ARM lenders offer loans with negative amortization. This means the payment can’t increase by more than a specified amount if interest rates go up, but the unpaid interest is added to your mortgage balance.

This is all right if the home also increases in market value. But if it doesn’t, you could find your equity being wiped out. However, if you only plan to stay in the home for a few years, then a negative amortization loan would be all right because there probably won’t be much negative amortization interest added to your loan’s principal balance in a few years.

If you plan to keep the home more than a few years, my suggestion is to shop around among lenders on your own. Perhaps you will discover a better lender where you can qualify for a loan that doesn’t have negative amortization.

Can Lender Transfer Loan Out of State?

Q: About two years ago, we got our home loan from a local savings and loan. We have our checking and savings accounts with the same S&L; and it is very convenient for us. But last week we received a notice that our loan will now be serviced by an out-of-state lender we have never heard of. Both my husband and I get paid on the 15th of the month and we made our loan payments on the same day. Is there any way we can stop this?

A: Welcome to the multibillion dollar world of loan servicing. You are the latest victim and there isn’t much you can do. If it will make you feel any better, I have one mortgage that started out in California, moved to Texas, where it was transferred among several loan servicers, then it moved to Oklahoma and now it is in Toledo, Ohio, where the loan servicer is doing a terrible job. All during this time the loan has been owned by Fannie Mae, but the servicing keeps getting sold and transferred. The same thing is happening to your loan.