The birth of the Mortgage Payoff Acceleration Program.
Beginning in 1985-86, the concept of biweekly mortgage payments was featured byUSA
Todayon the front page of it's "Money" section. Here in part is how it read:
What started as a mortgage lender's marketing gimmick is on its way to becoming
the hottest home loan of the decade. It's the biweekly mortgage, and it's as simple
as paying half a monthly payment every two weeks. The attraction: Biweeklies
reduce interest expense and build home equity faster. Problems with biweeklies:
They double lender's bookkeeping and are tough to sell to investors in the
secondary market--the final destination of most mortgages today.
One person's problem can be another person's solution. The key to this business and its success can be found in that last paragraph in the USA Today article above.
Lenders had problems offering biweekly mortgages. Some borrowers shunned biweeklies altogether since they thought they could just call their bank and change the payments themselves. Homeowners quickly discovered that the bank that loaned them the money had sold their mortgage. Their bank now just serviced the loan by collecting the payments.
We have found creative ways to solve the problems with the biweeklies, providing a means to create dynamic savings of time and money on your mortgage.
How does the mortgage work?
When somebody buys a home, in most cases that buyer will need to borrow money from a lender to help finance the purchase. The terms of a loan are written into a simple document called a "note".
The note specifies how much the home buyer borrowed from the lender, the interest rate, the term of the loan and the monthly payment.
The note itself, however, is only the promise to repay the money that has been borrowed. With only a note, the lender has no collateral for the borrowed money. Therefore, if the borrower fails to pay his monthly payment as outlined in the note, the lender has no recourse. That is where a mortgage comes in. The mortgage (or deed of trust in many states) not only outlines the terms contained in the note, but also gives the lender legal recourse to take possession of the property if the borrower fails to comply with its terms. The mortgage is the lender's security that the note will be repaid.
Let's use specific numbers to further explain.
If a person borrowed $100,000 at 8.5% interest for 30 years, their monthly payment to the lender is $768.91.
When the borrower makes his first paymet, the amount of that payment includes interest on the unpaid balance of the loan, with the remainder of the payment to be applied against the principal balance, thereby reducing it. That is called amortization. (See example of amortization).
Since the amount borrowed was $100,000, the amount of interest due for the first month is computed by multiplying the unpaid balance of $100,000 by the monthly interest rate, which is 1/12 of the annual interest rate of 8.5% (.085 divided by 12 equaling .070833 percent of $100,000 is $708.33. So out of that first montly payment of $768.91, $708.33 is interest. The remaining $60.58 is applied against the unpaid balance, thereby reducing the loan to $99,939,42. That remaining balance is what the borrower is charged interest on for the subsequent month.
Since the unpaid balance decreases each month, the amount of interest charged decreases also, leaving more of the monthly payment applied to reduce the unpaid balance. As you can imagine, each month a payment is made, more and more of the payment is applied toward reducing the unpaid balance, and less and less to the interest cost. During the first 10 years only $11,396.80 of the principal is paid off. The other $80,872.40 paid during those 10 years is all interest! So you can see that interest keeps compounding on virtually the entire loan. Now you can see why banks have the largest buildings in town.
What is a biweekly mortgage?
Imagine what would happen if, instead of making 12 monthly payments in a year, the equivalent of 13 payments were made, with the 13th payment being applied entirely toward reducing the unpaid balance. Let's use our same mortgage example of a 30-year, $100,000 mortgage at 8.5% interest. Without that 13th payment, the unpaid balance would only be reduced by about $755.92 during the first year. By making that 13th payment the unpaid balance will be reduced by an additional $768.91, which in turn will reduce the amount of interest charged in subsequent months. The bottom line is this: if this example were your mortgage, you would save $50,650.24 in interest and payoff your mortgage in 22 years, 9 months instead of 30 years.
This is how the Mortgage Payoff Acceleration Program works. A new checking account is opened in your name in a FDIC insured bank. You are not charged a fee for this account. Every 2 weeks, one half of your monthly payment is electronically debited from your bank to your new account. Once a month, one week prior to the due date, the monthly payment is forwarded to the mortgage lender.
FDIC insured account.
You always stay in control by establishing the automatic debiting function in your own bank and checking account, which is in an FDIC insured account. In this way you are assured of total security over your monies at all times.
Mortgage Payoff Acceleration Program (MPAP) Works.
MPAP is a biweekly mortgage payment program that elctronically debits homeowner's accounts every two weeks through the Automatic Clearing House (ACH) System by participating FDIC banks in the Federal Reserve System. The biweekly debits are equal to at least one-half of the real property owner's existing mortgage payment. Thus, if the monthly mortgage payment is $1,000, then $500 would be debited every two weeks. Through this method, 26 payments are made over the course of the year, the equivalent of 13 monthly payments rather than 12. All of the extra payment is applied exclusively toward a reduction in the principal of the mortgage. For example, take an average $100,000 mortgage for 30 years at 10% interest. Making regular monthly payments, a homeowner would pay $215,928.25 total interest. With a biweekly payment plan, he would not only reduce the term by 8 years, 8 months, he'd pay only $142,499.38 in interest---a savings of $73,429.37. (See Reduction Comparisons).
Even if a homeowner doesn't plan to keep his home for the entire term of his mortgage, he can still benefit by switching to a biweekly payment program. After 5 years, using the same example of a $100,000 mortgage, he would have $8,833.71 in equity paying biweekly, as compared to $3,425.56 paying monthly.
Our service does not change the existing mortgage. We charge a fee for initiating, processing and administering the biweekly automatic debit service. We undertake no financing or refinancing of motgages, nor do we provide any other financial services or advice. Thus there are no charges, as would be common in converting to a biweekly mortgage that is managed by a bank, financing or refinancing costs closing costs, appraisal fees, etc.
Why most do-it-yourself payment plans don't work.
Although the property owner has the option of accelerating principal reduction on his own, experience has shown that most Americans simply do not have the extra cash to make additional lump sum payments. Moreover, the great majority of homeownres, in fact, do not attempt to make additional payments.
Just using a service to prepare a tax return or engaging a Realtor to sell a house, we provide a service that offers a disciplined, structured method that assures funds will be available to make the principal reduction payments and thereby enable real property owners to realize savings of up to 33% in total interest costs, shorten the life of the mortgage by up tp 33%, and create more rapid buildup of equity on the property.
Can banks offer biweekly mortgages?
Yes, banks can offer a true biweekly mortgage, but the cost of originating a new biweekly loan can often be many times higher than simply enrolling in the Mortgage Payoff Acceleration Program. Few banks offer a true biweekly mortgage, and even when they do, qualifying for such a mortgage is normally more difficult than qualifying for a traditional monthly mortgage.
Why don't more banks offer biweekly mortgages? It's simple. They would have to change over to a new software system for their computers to track a biweekly and this can be very costly. The program we use has solved this problem for homeowners without the cost of converting to a true biweekly mortgage.
Also, banks can accept additional principal payments at any time---but when was the last time you sent a check to your bank as a principal only payment? If you lack the discipline to do so, we urge you to set up the automatic debiting function either through another bank or us. That way it is done for you automatically every two weeks.
"Here's how it works"
The Mortgage Payoff Acceleration Program (MPAP) is a simple, proven method that allows homeoners to save thousands of dollars in interest payments on their mortgages, reduces the mortgage term by up to one-third or more, and builds home equity substantially faster. All this is accomplished by tailoring a homeowner's payment method to the way most Americans are paid--every two weeks.
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