Definition
A Working Mortgage is a specific type of mortgage loan where payments are made more frequently than the usual monthly schedule. Typically, these payments are set to coincide with the borrower’s pay period, which often means bi-weekly or even weekly payments. Payments under a working mortgage may be deducted directly from the borrower’s paycheck, simplifying the process for the borrower and ensuring timely payments.
The increased payment frequency leads to quicker loan amortization – meaning the loan principal is paid down faster – and ultimately results in lower overall interest payments throughout the life of the loan.
Examples
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Bi-Weekly Payments: A borrower enters into a working mortgage agreement where they make payments every two weeks, aligned with receiving their paycheck. Suppose the monthly mortgage payment would have been $1,200. In this case, the borrower makes bi-weekly payments of $600. Because they are making 26 payments a year (52 weeks / 2), this works out to 13 full monthly payments annually instead of 12, accelerating the mortgage payoff.
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Weekly Payments: A borrower opts for a working mortgage that requires weekly payments. If the standard monthly payment is $2,000, the weekly installment would be $500. Over the course of the year, they make 52 payments, equating to 12 monthly payments plus four extra weekly payments, reducing the principal more quickly and resulting in less interest over time.
Frequently Asked Questions
Q: How does a working mortgage differ from a traditional mortgage?
A: In a traditional mortgage, payments are typically made monthly. A working mortgage allows for more frequent payments, such as weekly or bi-weekly, which can lead to quicker loan amortization and lower total interest payments.
Q: Can I save more money on a working mortgage?
A: Yes, since a working mortgage amortizes faster due to more frequent payments, you will likely end up paying less interest over the life of the loan compared to a traditional monthly payment structure.
Q: How are payments deducted in a working mortgage?
A: Payments are often automatically deducted from the borrower’s paycheck, simplifying the process and providing peace of mind for borrowers who worry about missing a payment.
Q: What are the benefits of a working mortgage?
A: Benefits include faster loan payoff, lower overall interest costs, and automatic payment deductions that make managing finances easier.
Related Terms
- Amortization: The gradual repayment of a loan over time through regular payments that cover both principal and interest.
- Interest: The cost paid by a borrower to a lender for the use of borrowed funds, typically expressed as an annual percentage rate.
- Principal: The amount of money borrowed or the outstanding balance of a loan excluding interest.
Online Resources
- Investopedia: Mortgage Basics
- Bankrate: Mortgage Rates and Calculators
- Consumer Financial Protection Bureau: Choosing a mortgage
References
- “Investopedia: Weekly Payments and Bi-Weekly Mortgages,” Investopedia.
- “Federal Housing Administration: Mortgage Payment Plans,” U.S. Department of Housing and Urban Development.
Suggested Books for Further Studies
- “The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices and Pitfalls, Second Edition” by Jack Guttentag
- “Mortgages 101: Quick Answers to Over 250 Critical Questions About Your Home Loan” by David Reed
- “The Complete Guide to Home Loans: A Sourcebook for Home Buyers and Homeowners” by Julia Shanks
