Does a Bi-Weekly payment plan save me enough money to make it worthwhile?

Yes! With a bi-weekly payment program, the homeowners pay one-half of their normal mortgage payment every two weeks instead of once a month. Because you are making a payment every other week, you make a total of 26 payments a year (there are 52 weeks in a year.)

These 26 payments are the equivalent of 13 full payments for the year, versus the 12 payments you would make with the regular monthly payments. So you are essentially making one extra payment a year. Even though it doesn’t sound like a huge savings, it can really add up over time.

Let’s take a look at a $200,000 mortgage at 6.5% interest rate. Your monthly Principal and Interest (P&I) payment would be $1,264.14. By splitting that payment in half ($632.07) and making this payment every other week, you would pay off your mortgage in 23 years instead of 30 years. The savings in interest over the course of your mortgage would be in excess of $60,000.00.

Below is an amortization tables that shows a standard 30 year mortgage versus one using the bi-weekly payment plan:



So you see that the mortgage is paid off in 24 years. With the traditional mortgage, you would still have 6 years of payments left. Over the 24 years that you made bi-weekly payments, you made extra payments (that 13th payment each year) of $30,339.84, which gives you a savings of $60,751.68.

Even if you don’t plan on living in your home for 30 years, the bi-weekly program can still save you thousands of dollars in interest. After 5 years, your principal balance would be $7,730.13 lower. In those 5 years, you made extra payments of $6,320.80 for an interest savings of $1,409.33. After ten years, the cost savings would be $5,759.82 and the principal balance on your mortgage would be $18,401.42 less than with the regular payment program.

So, is the bi-weekly payment program good for everyone?

No. The bi-weekly payment program works really well for those homeowners who are sure they have the funds available when the payments are due. Bi-weekly programs almost always require an automatic withdrawal from a checking or savings account. If you typically use the 15-day grace period that is standard with a mortgage, you would NOT be a good candidate for this program. This program works very well for those homeowners who have bi-weekly pay periods, because you can make your payments fit your pay schedule to make sure the money is always there.

Can I save this kind of money without signing up for the bi-weekly payment program?

Yes. You can achieve the same results without the bi-weekly payments if you add an additional principal payment to your regular payment each month. In the above example, if you add an additional $105.35 to your payment each month (the equivalent of 1/12 of your regular payment) you will achieve the same results that the bi-weekly payments will. You will pay off your mortgage in about 24 years by adding one additional payment each year.

I actually advise my clients to do this for several reasons. First, there is usually a fee to enroll in the bi-weekly payment program. Second, if you use the grace period on your mortgage (or, if your income fluctuates and is not consistent) it can be easier to make the payments yourself and add the additional principal.

On the other hand, some of my clients see the bi-weekly payment plan as a forced savings plan. They say they don’t even notice that there are two extra half-payments made each year, and it pays down their mortgage more quickly without them even thinking about it.

Bottom line, you can save a lot of money by paying extra on your mortgage – whether you use a bi-weekly payment program or do it on your own.

---

How can a “carpeting allowance” be a bad thing?

On many real estate sales contracts we see credits from the seller to the buyer in the form of “carpeting allowances” or “repair credit.” Basically, a buyer wants to purchase a home but wants the seller to replace the carpet or make some other repairs to the property. The sellers are unwilling to make the repairs before the close of the property, either because they don’t want to pay for the repairs out of their own pockets or they don’t want to wait to close on the property. So the sellers agree to give the buyers a credit at closing out of the proceeds from the sale.

So, what’s the problem? Sounds like everyone is getting what they want.

The problem with this is that the lender will not usually allow a credit directly from the seller to the buyer at closing. They will allow the seller to pay for closing costs, and other prepaid items for the buyer, but the money does not go directly TO the buyer. One of the reasons for this is that sellers are not allowed to provide the down payment for a home purchase to the buyers. So lenders do not allow these types of 'repair credits' because it would be an easy way for sellers to get around the no-down-payment rule.

When there is a repair credit on the contract, the lender will reduce the sales price by the amount of the repair credit and calculate the loan to value (LTV) off of that reduced sales price. For many transactions this will not have much of an affect. If the buyer has a large down payment, and if the repair credit is relatively small, the buyer will not really notice any difference.

The problems arise when the buyer has a smaller down payment, and/or the repair credit is large relative to the sales price of the property. Let’s look at the following transaction:

Sales Price: $150,000
Down payment (5%): $7,500
Mortgage $142,500

Let’s now assume that the seller is giving the buyer a $3,500 carpeting allowance at closing. The lender will reduce the sales price by the allowance and calculate the LTV off of that sales price.

Sales Price: $150,000
Allowance: $3,500
Effective Sales Price: $146,500
Mortgage $142,500
LTV: 97.2%

Now, the buyer thought they were going to be able to do a 95% LTV Conforming Fixed Rate loan. Because of the credit at closing, they either have to increase their down payment to $10,825 which would give them a loan amount of $139,175 and an LTV of 95% or, they would have to get a different mortgage program that allowed for a higher LTV. Most likely, since the buyer was only putting 5% down on the property in the first place, the second option is the most likely one. And, the mortgage programs available to the buyer now, would usually result in a higher interest rate and/or higher mortgage insurance payments on the program.


So, what can we do so everyone comes out a winner?

There are a few ways to deal with repair credits that will accomplish the goals of the credits without breaking the rules or harming the buyer. Here are three:

1) The seller agrees to lower the sales price by the amount of the credit. The sellers will still walk away with the same amount of proceeds from the sale of the home and the buyer will still be able to make a smaller down payment and get the mortgage they initially wanted. The buyers are also getting a better sales price. Unfortunately, the repairs have still not been completed and the buyers will now have to make these repairs with their own money. Chances are, they do not have the money to make the repairs or they would not have asked for the credit in the first place.

2) You can write in the contract that the seller agrees to pay a certain amount of money to a contractor of the buyer’s choice from the seller’s proceeds at closing instead of making the repairs. The money is not going directly from the seller to the buyer – it is going to the contractor for repairs agreed upon in the contract. This would have to be approved by the lender.

3) The seller can get bids for the work that needs to be completed and agree to set up an escrow account for the work to be performed after closing. The work will have to be completed, and an inspection will need to be performed, before the money will be released from the escrow account. Any money left in the escrow account after the repairs have been made will go back to the seller unless other arrangements were made. This is generally more acceptable to the lender since the money is held in escrow until the work in performed and the lender will verify that the work has been completed.

Although seller credits have not been allowed by mortgage lenders for quite awhile, I do still see them written into contracts. Many Realtors and attorneys are not aware of this, so if they are written into your contract, make sure it's done properly.

---

What is a short sale?

With the increase in foreclosures lately you may have heard the term “short sale” and wondered what it was. A short sale is when the lender will accept less than the full amount due on a mortgage when a property is sold. Usually, the lender will accept the short sale to avoid the time and expense of a foreclosure.

When a borrower is in default on a mortgage they not only owe the back payments but also may owe late fees, property inspection fees, attorney fees, etc. This can add up quickly to eat up all the equity the borrower had in the property. If the borrower is unable to bring the account current the lender will then foreclose on the property. With a foreclosure, the lender can lose up to 40% of the mortgage amount because of the extra costs involved with foreclosing on a property: attorney fees, court costs, lost interest, eviction costs, property maintenance costs, and selling costs. Foreclosing on a property can also take up to two years in some states. Therefore, it is sometimes in the best interest of the lender to accept the short sale.

It also can be in the best interest of the borrower. They will not have to endure the time and stress of a foreclosure and their credit may not be as adversely affected as it would with a foreclosure. It is quicker and easier and does not subject the borrower to the embarrassment of a foreclosure.

How does it work?

The first thing the borrower should do when they can no longer afford a property is to contact the lender immediately. The last thing a lender wants to do is foreclose on the property. Lenders typically have departments that work with people who are behind on their payments to resolve the situation. If you cannot resolve the default with the lender, and you want to see if they will accept a short sale, they will direct you to the department that handles short sales.

The lender will usually require the borrower to submit a lot of information to the lender in order to consider the short sale. The information required may include:
• Income documentation such as W-2s and pay check stubs to verify the borrowers’ income.
• Bank statements to verify the borrowers’ assets
• Hardship letter – this letter will describe for the lender the reasons the borrowers are in the financial position they are in and will ask the lender to accept the short sale. Borrowers should make this letter sound as sad as possible and back up the story with any documentation you may have such as medical bills, etc.
• Fair market value for the property – depending on the lender they may require an appraisal or may accept an opinion from a local Realtor know as a Comparative Market Analysis (CMA).
• Preliminary proceeds sheet from the sale of the property. This will show the proceeds of the sale of the property after the mortgage is paid off and all other closing costs and fees are paid. This will be negative in the case of the short sale and this negative amount is the amount of the shortage.
• Listing agreement and purchase agreement when they are available.

When the lender reviews all of this they may or may not approve the short sale. If they do not approve the short sale they will proceed with the foreclosure. If they do agree to the short sale you will close on the sale of your property and the lender will take the loss.

So, is the borrower off the hook?

Not necessarily. The lender still has options to try to collect this shortage. As a condition of the short sale the lender may require the borrower to sign a note to repay the shortage. They may also file a collection or a judgment for the amount of the shortage. This is something that an attorney with expertise in this area of real estate needs to be consulted.

Also, the IRS may come after the borrowers for income taxes on the amount of the shortage. If the shortage was forgiven, the lender will report the shortage as income to the IRS and the IRS will collect taxes on this amount. Again, for the specifics on this please consult a tax professional.

---