A NEW WAY TO PAY American homeowners throughout the nation are being introduced to a new way of paying off their home - the biweekly mortgage prepayment program. Biweekly mortgages differ from conventional 30 year loans because instead of paying one monthly payment, twelve times per year, a homeowner will make one half of the normal monthly payment every two weeks. Why should it matter if a payment is paid on the first of each calendar month or every two weeks, you might ask? Well, let's look at this concept a little closer. There are 52 weeks in each year. There are also 12 months in each year. If you divide 52 weeks by 12 months you arrive at roughly 4 1/3 weeks per month. The month of January has 31 days or 4 1/3 weeks. In February, there are only 28 days, and thus, there are 4 weeks even. If you're like most homeowners, you'll make your house payment on the 1st of the month and will make 12 monthly payments per year. Usually, the house payment is the single biggest expense! 26 biweekly payments On the biweekly mortgage or payment plan, you will pay one half of your regular monthly mortgage payment every two weeks. If we look at the number of weeks per year, there are 52. Thus, if we are paying a mortgage every two weeks, we can easily calculate the total number of yearly biweekly payments by dividing 52 weeks by 2 (biweekly). So, we come up with 26 biweekly payments each year. 13 monthly payments Taken one step further, if there are 26 biweekly payments in a year, and you divide again by 2 (half the monthly payment), you will end up with 13 monthly payments instead of the usual 12. All we have really done is to eliminate the windfall that occurs each time a month has several extra days. Most Americans are paid biweekly, so this type of payment schedule is becoming very popular. They started in Canada Biweekly mortgages have been popular in Canada for two decades. There are 3 principal reasons for this. First, it makes sense to have loan payments correspond to paydays. Second, it also makes the mortgage payment easier to handle because you are paying half a payment as opposed to the full payment. Third, in Canada, mortgage interest is not deductible under their tax laws so anything that will lower the overall liability of each homeowner is of prime concern. U.S. banks get involved In the early 1980s, a few banks in the Northeastern U.S. caught onto the idea of biweekly mortgages but ran into some roadblocks. Long term mortgages are ingrained in this country's financial history and making changes in the mortgage industry is not easy. Also, banks and mortgage lenders receive mortgage payment checks from homeowners at the beginning of each calendar month and so by changing to a biweekly payment plan, the banks would have to double the number of payments processed each month which would essentially double their mortgage servicing costs. That by itself was enough to kill the biweekly concept entirely. There was also another hurdle that offered continuing resistance to biweekly mortgages in this country and that was how to pay for them. Back in the early 1930s, just after the Great Depression, Congress was trying to find ways to get the U.S. economy back on track. The country needed housing badly but there were major problems to deal with. The largest problem with the housing industry after the Great Depression was lack of funds for construction and home loans. Banks did not have much capital and each time they made a home loan, their resources were further depleted. The Fannie-Mae connection To correct this problem, Congress decided to create a quasi-governmental agency known as Fannie-Mae, the Federal National Mortgage Association. Fannie-Mae was set up by the federal government under a federal corporate charter. Securities were sold to the public through brokerage firms and by buying stock in Fannie-Mae, you were essentially buying U.S. government-backed securities. Thus, if you had a VA or FHA mortgage, you were basically buying part of your own mortgage. The money generated from the sale of securities was used to buy mortgages from banks throughout the country, thus replenishing the money supply. This allowed each bank to make home loans and then resell the mortgages to Fannie-Mae to quickly recover their money. A huge success Fannie-Mae was a huge success and eventually gained competitors such as Freddie-Mac and others that bought mortgages from the banks and resold them as securities. This continues to this day and is part and parcel of our financial system...which leads to another problem for biweekly mortgages. Since payments to investors are usually paid monthly, there was the problem of how to pass on investment distributions to investors. No one was prepared to change this system, just for a clever new type of mortgage. This became a roadblock to popularity for the biweekly. Sure, they were popular for homeowners but if stockholders did not have an easy way to invest in the new mortgages, they were doomed to a lack of capitalization. Since biweekly mortgages had so much potential and were gaining popularity so quickly, many banks began offering them and retaining the mortgages in their own investment portfolio as a gimmick to attract customers. And it worked very well as they became every more popular. Tremendous potential As Fannie-Mae became more involved with the biweekly mortgage, they realized its tremendous potential and saw its popularity gaining rapidly. Since Fannie-Mae is essentially controlled by the U.S. government, the biweekly was pushed as an equity builder because the government likes to encourage Americans to invest and save...and the biweekly mortgage built home equity faster than anything! In early 1988, the final roadblocks for biweekly mortgages were removed by an announcement from Fannie- Mae. They agreed to buy biweekly mortgages from banks provided the biweekly payments were debited from the borrower's account using the ACH (Automated Clearing House) run by the Federal Reserve System. Automated electronic reoccurring debits are far less expensive than opening envelopes with coupons. Not only that, but Fannie-Mae also solved the investment hurdle by passing payments on to investors monthly. Roadblocks gone in 1988 With these roadblocks removed in February of 1988, the biweekly mortgage had successfully become a part of the American mortgage system and could now grow at a pace more rapid than anything seen in recent mortgage history. Banks and mortgage lenders throughout the United States are changing computer software and procedures to handle the new biweekly mortgage popularity. Due to the enormous acceptance or this type of mortgage, more and more banks and lenders are beginning to offer them as the word spreads. And why not?