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Biweekly Mortgage

November 11, 1990

In his Aug. 5 item entitled "Borrower Can Set Up Biweekly Schedule," Robert Bruss makes two misstatements that perpetuate incorrect myths surrounding bi-weekly mortgage payments.

First he states, "The idea behind the biweekly mortgage plans is yhou make 13 monthly payments each year instead of 12. . . ." Not only is that not the purpose but, secondly, how can 26 biweekly payments possibly equal 13 "monthly" payments during a year?

The true "idea" behind biweekly payments originated in Canada, where a tremendous portion of wage earners is paid biweekly. The intent wsa not to save borrowers any money; this saving was a byproduct of this program designed to make it convenient for employees to make their mortgage payments by having them taken out of each biweekly paycheck.

The benefits to the mortagor are staggering. Why? Because by paying principal 26 times a year instead of 12, not onl yis the interest saved substantial (about one-third less than the interest on a monthly-paid mortgage), but the number of years of making payments can be reduced by one-third to one-half comapred to a 30-year 360-payment plan.

This saving is not accomplished by making 13 payments during a 12-month period because via the latter method you're not reducing principal nearly as rapidly as in the case of principal reduction every two weeks.

So, why hasn't the biweeklypayment system swelled here? Bankers say they are unable to program their computers to accept it--yet Canadian computers had no trouble. The true reason is that lenders make more money "the old-fashioned way." Moreover, contrary to the case of hte Canadians who get no tax deductions for mortgage interest paid, Americans have less inducement to have interest payments reduced.

If you can persuade a lender to convert your loan to biweekly, be sure to have the loan recalculated based upon actual principal balance at the time. And while banks generally cannot preventyou from making extra principal payments on the monthly schedule, while this will reduce what you'll owe on the "back end," you end up paying interest on some principal that's already been repaid.


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