mortage and interest rates vs payment intervals?

[navyblue2000]

Anyone with any mortgage or financial knowledge see if you can help me make sense of this.

Right now I am paying ~755 a month on 5.1% interest rate. I'm set up to autopay, which is really cool, etc etc...BUT...I got a letter from the bank who did my mortgage (who I also have checking/savings with) offering for a 1 time payment fee, to do bimonthly payments so interest doesn't accrue as fast.

Here's my thought and question: First off, I don't want to pay the 300 dollar one time fee, plus an extra dollar on every draft. Second off, Since I bank with these people as well, I can set up a fund transfer from my checking account. So, I figure I can just transfer half, twice a month.
Here's where I think it might get ineresting. Since mortgage interest compounds daily (i believe), would it be better to pay WEEKLY? I'm curious of this, because I can set payments up to pay once a week, which seems like it would be more beneficial.

One more question: Why wouldn't institutions offer weekly payments as well as bi monthly? Is it something that people are just scared of? it's basically 1 payment of 188.50 every week. Since most people are paid bi-weekly I would imagine that is why people don't opt for it thus making it unpopular? Or...is there an advantage to paying bi-monthly instead of weekly?

[camaro_speedemon]

Bi-monthly... as in every other month?
Or do you me semi-monthly... as in twice a month?

[Everglades W68]

It depends on the terms of your loan/mortgage; however, it is extremely likely that you get the exact same result for FREE.

Most standard loans call for monthly interest accrual/compounding (side note: except for when the loan is paid off - then it is sort-of calculated on a daily basis using a "monthly" factor).

Think about it: Most loans say you will pay $X per month. As long as you pay by the 15th of the next month, it is Ok. For example in the case of a mortgage payment due on May 1, the same amount of interest accrues regardless of whether the payment arrives on the 23th of April (a few days early) or the 12th of May (they give you a 15 day grace period).

Therefore, sending in two payments a month will NOT cut down on the amount of interest accruing -
UNLESS you have a loan that accrues interest up to the day when interest is actually paid. This could not be a standard, fixed rate mortgage because the variability in the interest accrual would force the term (# of months) to be variable instead of fixed. This would be a very unusual home loan.

So...
The normal "pitch" I've seen from banks for what you are describing is a bi-weekly payment plan (ie, you pay 1/2 of a monthly payment every other week).

The key to this is that you end up paying 26 payments of 1/2 the normal monthly payment. In other words, you pay the equivalent of 13 monthly payments each year instead of 12.

The key here is NOT the timing of the payments as much as it is the fact that you are paying extra principal.

You can do this yourself very easily for $0 (free mortgage mod!) Take your monthly payment (P&I portion only) and divide it by 12. The result is the extra amount of principal you should remit to the bank each month to equal 13 payments per year.

You end up better off this way because:
You keep the $300 "fee."
You keep the $1 processing fee.
You keep the interest the extra payment earns during the month.
You probably will pay down the loan faster than under the bank's plan because you are paying a little extra each month as you go along rather than having to wait for the bank to accumulate the extra principal for you.

I'll answer your second question separately.

[Everglades W68]

Originally posted by navyblue2000:
One more question: Why wouldn't institutions offer weekly payments as well as bi monthly? Is it something that people are just scared of? it's basically 1 payment of 188.50 every week. Since most people are paid bi-weekly I would imagine that is why people don't opt for it thus making it unpopular? Or...is there an advantage to paying bi-monthly instead of weekly?

Two reasons:

1. Most people do not want to be bothered by weekly mortgage payments, hence, monthly payments are the norm.
2. Monthly payments are the norm. Banks accumulate/package a bunch of mortgages togther and sell them off to investors as one big pool of identical mortgages. Those pools are all set up around monthly payments. Mortgage investors are used to monthly payments, not weekly or other periods. It also makes the accounting and amortization for interest more complicated.

The pools of mortgages (AKA "tranches" in the lingo) have become more varied over the past decade. Now we have more variable interest rate options, the 4-way "pick-a-pay" type loans and including negative amortization and interest-only loans. However, I don;t think you see much investor interest in bi-weekly or weekly repayments.

Again, generally the interest really amortizes / accrues on a monthly basis, not daily.