"Anyone who takes out a 30-year mortgage--particularly with the new tax law changes--is doing himself a terrible disservice. The only way you can justify the 30-year mortgage is with a biweekly payoff."
That statement explains why John Chenoweth, executive director of the Minneapolis Employees' Retirement Fund, one of the top-rated private pensions funds in the country, went all out a year ago and took administration of his $100-million-plus portfolio of biweekly mortgages away from the bank that had been handling them and assumed the chore himself. A switch to 100% electronic transfer of funds was made possible, he concedes, through utilization of LoanLedger, a biweekly software package developed by Marina Del Rey-based Dynamic Interface Systems Corp. (DISC).
Speeds Repayment of Loans
Sometimes called "the Yuppie Mortgage" because of its appeal to young, upwardly mobile professionals and their interest in the fast buildup of equity in their home--enabling them to cash in on it and move on to a better home sooner--there is nothing mystic about the biweekly payment.
Instead of one monthly payment for mortgage interest and principal, as in the conventional 30-year mortgage, half the normal payment, instead, is collected every other week. The result is not simply the equivalent of one extra month's payment being made each year, but the steady reduction of principal every 14 days instead of every 30 or 31 days.
Thus, at 9.25% interest, a biweekly $100,000 mortgage pays off in slightly more than 21 years, instead of 30, and saves $63,819 in interest. On a $200,000 mortgage, the interest saved is $127,637.
"And," as G. Randall Kinst, director of secondary marketing for Mortgage Loans America, a large wholesale mortgage banking firm located in Campbell, Calif., says, "a 30-year conventional loan would need an unheard of 6.7% interest rate to achieve the same savings realized on a biweekly."
Essential to the biweekly mortgage, however, is the computer hardware and software which makes it possible for the lender to tap, electronically, into the home buyer's bank account every other week and debit the mortgage payment directly.
Normally, but not always required, is the direct deposit of the home buyer's biweekly paycheck.
No postage, no coupons, no manual bookkeeping at all and "a delinquency rate," according to Haden Edwards, the Bedford, N.H., based producer of the LIFT biweekly mortgage package (Less Interest Faster Term), "that is almost nil--about one-fourth of 1% versus a national average of about 5.3%."
Higher Incomes Required
While a buildup in equity and fast payoff comparable to the biweekly can be achieved, or bettered, through the more conventional 15-year, or 20-year mortgage--a secondary market for which already exists with Fannie Mae--both require much higher incomes on the home buyer's part to qualify.
Using the secondary market's normal standard--monthly principal and interest should not exceed 28% of the home buyer's gross monthly income--a monthly income of $3,003 will qualify a buyer for a 30-year, 9 1/2% $100,000 biweekly mortgage (whether conventional or biweekly). But for a conventional 20-year mortgage he will need a monthly income of $3,329, or for a 15-year mortgage, an income of $3,729.
Ironically, as mortgage interest rates rise--as they have, dramatically, in the past couple of weeks--the appeal of the biweekly increases too, since both payoff time and interest savings move in inverse relationship to interest rates. At 9.25%, the 30-year biweekly pays off in a bit over 21 years, at 12% it pays off in 18.8 years.
Born in Canada
And while home mortgage interest remains tax deductible, the new tax changes, as Minneapolis' Chenoweth noted, give the biweekly two more attractions. Previously, depending on the home buyer's tax rate, Uncle Sam could be picking up as much as half of his mortgage interest costs.
Under the new tax law, however, he will be picking up no more than 28% to 33% of the cost. It is hardly a coincidence that the biweekly had its birth in Canada, where no mortgage interest is deductible.
At the same time, however, since mortgage interest does remain deductible, it has stimulated consumer interest, too, in the home equity loan as a general purpose financing tool--putting still more urgency in building up home equity fast.
But as popular as the biweekly mortgage has become in other parts of the country, California lenders remain cool to it, citing primarily the lack of a secondary market for biweeklies, but reflecting, too, a reluctance to return to fixed-interest mortgages of any kind--the keystone to biweekly programs being offered in other parts of the country.
Not Much Demand