Bi-weekly payment program

My bank offers this service for free.  It basically makes an extra on month's payment in a year so you can pay off loan quicker.
Recently, loan was transferred to another bank.  They don't offer free bi-weekly.  It is a $300 sign up fee and a $5 monthly fee.  Can't I technically have my bank use my checking or savings account to schedule bi-weekly payments to this bank for free?

Depends on the bank, but if you pay online via the bank's website you should be able to apply payments and choose whether to apply it to principal. The payments are deducted via ACH from your account.

If you're already paying the bank interest on the loan, I don't see why you would want to pay additional fees just to give them money?

I'd call the bank to verify that there is no prepayment penalty and see if you can just send in an extra payment every year toward the principal.

Divide the payment by 12 and setup an auto transfer from checking to savings, so you can allocate money for that extra payment every year.  Instead of paying the bank $5 fee (+$300 setup fee) you should keep your money in savings (or money market) and make $5 interest for yourself.

momopi said:

If you're already paying the bank interest on the loan, I don't see why you would want to pay additional fees just to give them money?

I'd call the bank to verify that there is no prepayment penalty and see if you can just send in an extra payment every year toward the principal.

Divide the payment by 12 and setup an auto transfer from checking to savings, so you can allocate money for that extra payment every year.  Instead of paying the bank $5 fee (+$300 setup fee) you should keep your money in savings (or money market) and make $5 interest for yourself.

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Most lenders shouldn't have a prepayment penalty.  Yeah, you don't want to pay a fee to automatically schedule payments especially when you can easily schedule it yourself through your own bank for free.

You can make one extra payment or you can opt to just pay them more each month (with the amount in excess being applied to principal). As long as you don't have any prepayment penalty.  Just call the bank and confirm.   

Bullsback said:

You can make one extra payment or you can opt to just pay them more each month (with the amount in excess being applied to principal). As long as you don't have any prepayment penalty.  Just call the bank and confirm. 

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I did the same with my mortgage.  I just requested the bank to add $500 principal payment to my mortgage payment automatically.  If you do the math, you cut around 6-8 years of mortgage payments if you add an additional $500.  When I get a nice paycheck, then I'll walk in and make an additional principal payment

I remember this from the good ole Option ARM days but not sure how it worked.

I thought that you just split the monthly payment in half, paid on the 1st and the 15th. It was supposed to help pay down the interest faster.

Obviously, if you take the monthly and split it in 2 and then pay that bi-weekly, you'll get 13 months of payments (26 payments vs 24 [12x2]) but for the bi-weekly option on the O-ARM, I thought they just took the years payments and divided by 26.

Is there a significant difference in the loan reduction between paying extra monthly vs lump-sum extra payment annually?

If there is no significant difference between paying extra $500/month vs lump sum of $6,000/year, then it would make more sense to opt for the latter and keep your money in an interest-earning account (savings, CD, money market).

I would think the difference is your savings account is going to generate a lower return then the interest payment. So if you are putting it in savings, probably not. Time value of money and liquidity are varying thoughts.  If you were going to look at an efficient portfolio, if you have a low rate and are investing long (and your house is locked up long), you could argue that putting the extra money into your mortgage may not actually be that efficient vs. putting that money long into even an index fund). 

That said, plenty of people like the peace of mind of financial stability and additional equity in their home.  I fit in the camp that I like paying a little extra (but I'm also invested in markets, etc). Probably a little too liquid at times (more with potential short-term needs) than needed, but there is the peace of mind, partially because when I invest, I think very long and presume really nothing other then an absurd shock would create a need where I would have to liquidate and feel the pain of real losses (during a short-term correction, etc).