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Two mortgage payments a month is not the best strategy

Dear Benny: My lender just sent me a form notice suggesting that I can save a lot of money if I start making two mortgage payments each and every month. Does this make sense? –Jill

Dear Jill: There is a trade-off on what is called a “biweekly” mortgage.

Yes, you will save paying a lot of interest, but, depending on your tax bracket, your interest deductions will also be reduced.

Let’s take this example: You borrow $200,000 at 4.75 percent for 30 years. From the amortization table, you know that your monthly payment (excluding taxes and insurance) is $1,043. If you continue to pay this amount each and every month, on the 360th month you will have paid off your mortgage completely.

To explain: $200,000 x 4.75 percent means that the interest portion of your payment is $791.66. (200,000 x 4.75 percent = 9,500 divided by 12 months = 791.66.)

So when you make that first payment, it reduces the outstanding loan down to $199,208.34. If you do the calculation based on 4.75 percent of this new balance, when you make your next payment it will reduce the loan by $788.53, and so forth.

Yes, for the first seven years, your monthly payment covers more interest than reduction of principal.

But let’s say that instead of paying monthly, you decide to make two payments each month. In effect, you are now making 13 monthly payments each year, which will reduce the number of years you have to pay down to between 22 and 25, instead of 30.

But does this make sense? I think not.

As I have written on several occasions, you can accomplish this same goal by adding additional funds when you make your monthly mortgage. In my example, since your monthly mortgage is $1043.30, divide that by 12 ($86.94) and add that amount to your monthly mortgage.

You get the same benefits as with the “biweekly,” but you don’t have to send in two payments. More importantly, you are not obligated to make those extra payments if your financial situation changes. With the biweekly, you must make two payments per month.

If you opt to make a larger monthly payment, make sure that you write on your check “extra payment to principal in the amount of XX,” and also make a notation on any coupon that you have to send in. If you have arranged for automatic payments from your bank, send the loan servicer a letter advising that you are making additional payments toward principal.

And at the end of each year when you get your mortgage balance statement, confirm that all of that additional money has, in fact, been credited.

Dear Benny: I would like to save myself $200 in lawyer fees by changing over the deed to our condo from joint tenancy (my husband and myself) to our living trust.

When we purchased the condo four years ago, we failed to place it in our existing living trust, although we do have all those papers. It was just carelessness on our part.

I called an attorney here in Illinois who said it would cost $200 plus a filing fee at the recorder of deeds office. He also said I could probably do it myself by going online and downloading the quitclaim form and then bring it to the recorder of deeds.

There are multiple quitclaim forms. Could you advise me step by step how to do this? I am a senior citizen unfamiliar with legalese. –Joanne

Dear Joanne: You are correct. If you create a living trust but fail to put your property formally into that trust, you still own the property but the purpose of the trust is nullified.

I appreciate your concern to save some money, but in the long run it may be money well spent to get professional, legal advice.

However, in some counties the staff of the local recorder of deeds is helpful. So I suggest that you take your legal documents (the living trust agreement) to the recorder of deeds office in the county where your condo is located and ask if they have a quitclaim form that you can use.

If not, pay the lawyer and have peace of mind.

Benny Kass is a practicing attorney in Washington, D.C., and Maryland. No legal relationship is created by this column. Questions for this column can be submitted to benny@inman.com.

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