And what I mean is accelerated, as opposed to regular biweekly or regular weekly payments. Yes, there IS such an animal. I was hoping that the very first post on my new blog would be about something WAY sexier than this however you have to play with the hand that is dealt to you. I had a situation arise with a client a week or so ago and this has been on my mind. This is fairly basic stuff. We ALL know this, right?………..well, read on.
The Devil IS in the details.
An issue I ran into two weeks ago made me pause and start to understand just how pervasive the problem is. The “problem” being how much I am noticing people NOT paying attention to the details. The commentary below is a bit lengthy however bear with me. Please read through it. It is eye opening
• I met with clients two weeks ago. To put it mildly, there were in a sorry financial state. Health issues had impacted them in a big way. Their disability income was naturally much less than their employment income (and that is a topic for another day). Their monthly discretionary income was negligible and they had been suffering financially for quite some time.
As I gathered their financial information and put together their asset/liability statement, we arrived at the point where I asked them questions regarding their existing mortgage.
Their balance was around $60,000. Their house was worth about $200,000. Needless to say, it was the abundance of equity that allowed me to salvage their lives and put things straight.
However one glaring issue arose as I was handed their annual mortgage statement. They mentioned the balance, indicated they were paying $343.00 biweekly and announced they had been paying biweekly because they were told that was the better way to do it.
“You are correct,” I agreed. However as I glanced at their statement I was alarmed to see that while they were indeed paying biweekly, they were NOT paying an ACCELERATED biweekly payment; just a regular biweekly payment.
Now, some of you are going to ask “What’s the difference?” Not to be patronizing however this is the simplest way I know to explain it. Let’s use some real numbers – a $250,000 purchase with 10% down, $25,000 + a mortgage insurance premium of 2.2%, $4,950 = $229,950. I’ll use a 30 year amortization / 5 year term with a fixed rate of 3.29%. The payments look like this:
Accelerated Biweekly: $501.49
Regular Biweekly: $462.58
The accelerated biweekly payment is simply the monthly payment divided by two. Over the course of a year, it will equate to 1 extra monthly payment being applied to the principal balance each year, thereby accelerating the payment of the mortgage, hence the name.
The regular biweekly payment is the equivalent of the monthly payment multiplied by 12 and then divided by 26 payments throughout the year. It will equate to the equivalent of 12 monthly payments being applied to the principal balance each year; the exact same amount as a monthly payment schedule.
Over the course of a 5 year term, the interest savings are $432.64 which isn’t huge however what IS huge is that with the accelerated biweekly payment schedule the principal balance at the end of the 5 year term is $199,934.01 as opposed to $205,424.95. That is a difference of $5,490.93. THAT is a HUGE difference. And that is just in the initial five years.
The full difference over the run of the amortization is astronomical. The full amortization is shortened to 26 year, 4 months with an accelerated biweekly option saving approximately $18,105.42 in interest. (Well, not approximately, exactly.)
You might read that and say, “That doesn’t seem to be that much? I thought it would be higher!” That figure represents just the interest saved. What has to be added in is the amount of the 96 payments that are now not needed because the amortization has been retired in 26 yrs, 4 months and not 30 years. That total equals $44,407.68. Add that to the interest saved you now have a total of $62,513.10. How does THAT grab you?
My clients were upset to find out that their payments weren’t accelerated biweekly. I certainly didn’t work through this calculation with them. They had enough problems. This information would be akin to rubbing salt into their wounds. However, at some point, SOMEONE had their file in their hands and didn’t pay attention to the details.
• A week after this meeting, I had coffee with a Senior Investment Advisor with one of the Big 5 chartered banks. I was telling this story and extolling my new adage, “The Devil Is In The Details.” This was a senior banker with 15 years’ service. And an investment professional to boot. As I told the story, he asked, “What’s the difference between accelerated and regular?” Are you kidding me?
He admitted he wasn’t sure if his own mortgage was accelerated or not. He went home to check and guess what? His mortgage indicated regular, NOT accelerated.
Now, the devil is in the details.
• My point is everyone should pay WAY more attention to the detail of their payment schedule.
The argument could be made as to who is responsible for this. Of course, it is the mortgage professional that plays the biggest part in this particular issue. I suppose at the root of it, it is the client’s responsibility however all client’s are under the guidance of the professionals that are helping them along the way, be it the mortgage professional, realtor, insurance person and lawyer. As a team, we all play a part in guiding our clients properly so the end result is a happy homeowner that looks back fondly on their experience with all parties that were involved.
As a broker, I have lenders that offer both regular weekly and regular biweekly payment as well as the accelerated options. I also have lenders that only have the accelerated options. And it is a decision that gets dealt with properly, I assure you.
Thanks for making it to the end of this rather lengthy dissertation. I appreciate it.
If you have any questions about any of the above, I would be glad to answer them. Or if you have any comments, I would be glad to hear them.
Have a GREAT week and talk soon,