New Jersey is weighing a proposal that could potentially save homeowners tens of thousands of dollars on their mortgages.
Legislation moving through the pipeline in Trenton would require all financial institutions in the Garden State to allow homeowners to make biweekly and semi-monthly mortgage payments, rather than a single large monthly payment.
Currently some, but not all lenders allow borrowers to do this.
Assemblywoman Tennille McCoy, D-Mercer, Middlesex, who is a realtor in Mercer County, is the prime sponsor of the bill.
She said if the typical homeowner makes half a mortgage payment every 15 days instead of a full one once a month, they will wind up making roughly one additional payment a year.
“That in itself would decrease your interest by $30,000, $40,000, it could also decrease your mortgage terms,” she said.
She said the extra payment is applied directly to the principal amount borrowed, “so it reduces the total interest paid, and so that shortens your term limit.”
Rutgers University economist James Hughes, dean emeritus of the Edward J. Bloustein School of Planning and Public Policy, said allowing homeowners to set up this kind of payment schedule does make sense for them financially.
“They’ll be building up equity faster than if it were a monthly payment, but it’s not a silver bullet that’s going to change the world,” Hughes said.
He said depending on the length of someone’s mortgage, it can take several years to see the benefit.
McCoy said as a homeowner’s mortgage balance decreases, equity, which she described as the cornerstone of financial stability, increases, and that gives people options.
“If you’ve got kids going off to college, you want to get the kitchen and the bathroom done, home improvements, if there are some crazy emergencies, these are the things pulling that equity out of your home [can cover] to help you with those particular expenses,” she said.
“It’s sort of a painless way of saving,” Hughes said. “Very few of us have the discipline to religiously put away a portion of our salary to build up equity.”
The legislation would also prohibit financial companies from imposing penalties on borrowers who want to pay additional amounts toward their principal.
“By offering this flexibility it really is a measure that helps homeowners manage their cash flow more effectively,” McCoy said.