In general, it is best to shorten the terms of a particular loan in order to reduce the overall value of the payments. One should remember that the value of loan payments, especially those that have compounded interest, becomes considerably greater than its principal value as the term of payment is being extended. For instance, if a person borrows $1000 from the bank with a nominal interest rate of 10% compounded monthly and 2 years payment period, he will have to pay a single-payment of $1220.39 at the end of the loan term. On the other hand, he may also prefer to have multiple payments, where each of these is made in a predetermined interval such as annually, monthly, or weekly. This can reduce the additional payment called the interest for the loan.
With regards to monthly mortgage payments, it has been said that having the payments biweekly is a good way to minimize the overall additions on the principal value of the loan. Biweekly mortgage payment basically means that a person who borrowed the money makes the payment every two weeks, which accelerates the mortgage loan payoff. However, the yearly value in this form of payment is equivalent to 13 monthly payments instead of 12. Investment expert Jeff Rutt calls the 13th month as the “magic” in biweekly mortgage payments, which is advantageous to banks or any loan providers. According to him, this makes having this form of payment not advisable when dealing with relatively long payment terms such as 5 years, 10 years, and 15 years. Aside from the additional expense, biweekly payment can also reduce the financial flexibility of the borrower because the payment term becomes contractual.
As a renowned mortgage consultant, Jeff Rutt advises his clients who make biweekly payments to have 2 “3-paycheck” months every year. This money can be used to have the additional principal payments, which will gradually compensate with the 13th month of the loan term. The said additional payment is basically 1/12th of the monthly mortgage. By making additional principal payments, the borrower will no longer be required to make an extra Private Mortgage Insurance (PMI) as well as property tax or insurance payment per year.
Jeff Rutt also recommends his clients to avail the service of Bankrate to gain assistance on financial decisions. Before the client makes any final decision or apply any financial strategy, Bankrate will provide a finance advisor who will analyze first the individual circumstances on the client’s personal financial situation.