I received a call from one of my subscribers stating she was at a seminar where the speaker suggested to convert her conventional mortgage into a Bi Weekly mortgage. In a prior issue of THE NOTE PROFESSOR NEWSLETTER, I addressed this very subject. I think a reprint might be in order.

One of my readers asked me this question, "Is converting my conventional mortgage to a Bi-Weekly Plan the best way to pay my mortgage off early?" I always ask, "Is this my only choice?" This is not only a time value of money question, but also a question of how time consuming, and the difficulty of setting up a bi-weekly schedule, as compared to other methods of paying off your mortgage early. As with any time value of money question, your calculator will help you make a decision. Let's look at a typical mortgage 15 year note, and compare different methods of paying of the mortgage.

Conventional
Loan Amount : $200,000
Date of Loan : 1/01/2014
Interest : 8%
Payment Amt : $1,911,30
First Payment : 2/01/2014
# of Payments: 180
Total Payments: $344,035
Total Interest : $144,035

Bi-Weekly
Loan Amount : $200,000
Date of Loan: 1/01/2014
Interest : 8%
Payment Amt : $955.65
First Payment : 1/15/2014
# of Payments: 336
Total Payments : $321.225
Total Interest: $121,225

No doubt the Bi-Weekly plan will save you money, but let's look at it another way.

Let's break it down to yearly data.
$955.65 X 26 = $24,847
$1,911.30 x 12 = -$22,936
Extra Yr Payment : $ 1,911

Under the Bi-Weekly you make the equivalent of one extra monthly payment a year.

Let's divide this extra year's payment by 12 months = $159.29
Add to the regular monthly payment of $1911.30
Total real monthly Payment $2,070.59

If we put this new data into our calculator, we discover the total number of payments has been reduced from 180 to 156.

By adding $159 to monthly payment of the conventional mortgage the total payout is $321,800 by the end of its term. The total bi-weekly payout remains $321,225 by the end of its term. This is only a $575 difference when all is said and done.

Now you have to ask yourself, "Is it worth the time and trouble to make all those extra payments to save only $575 over 13 years?" Also, be aware that paying every two weeks means there are going to be some months where you have 3 payments. (Bi Weekly is NOT the same as twice a month).

For me, I would rather just have the option of making $159 OR MORE a month extra on my monthly payments, rather than being bothered to have to write a check out every two weeks. This is not to mention if things get tight, I can always just make my regular monthly payments and still keep my credit in good standing. On a biweekly schedule you do not have this option.

For a little calculator practice play around with making a full extra payment once a year. This will amaze you as to how fast your loan gets paid off. The wonders of compound interest and the time value of money can work for you or against you. Those who understand the time value of money collect interest; those that do not pay interest.

CONTACT ME if you have questions or comments. And remember, if you know of someone who has a note to sell, I DO PAY REFERRALS.



Copyright © H&P Capital Investments LLC
All rights reserved
Tom Henderson
a.k.a. THE NOTE PROFESSOR

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"A century ago, it took the public exposure of filth in the meatpacking industry to prompt passage of the Pure Food and Drug Act.  Almost a half-century ago, it took the discovery that safety was taking a backseat to comfort in the auto industry to establish the National Highway Traffic Safety Administration".

These were the opening remarks by The Director of the Consumer Finance Protection Bureau (CFPB), Richard Cordray, in a presentation to the Federal Reserve Bank in Chicago. His preface epitomizes how myths perpetuated by erroneous facts, give rise for the "need" of government to protect us by regulation. I can think of no better example of how bureaucracies, including the CFPB, are created by distortion, than the two examples given by Cordray.

Let's begin with the "filth" in the meatpacking industry. During the Spanish American War, meat was shipped to our troops in Cuba. The meat packers firmly instructed the military to place the meat in ice to prevent spoilage, however, the military did not heed the meat packers' instructions. Of course the meat rotted. The fault was not placed on the military not keeping the meat cool, but rather the meat packers were charge with furnishing our troops with tainted meat. The public's outrage for the meat packers sets the stage for even more distortion, which resulted in the Pure Food and Drug Act.

In 1906 Upton Sinclair, a devout socialist, wrote a FICTIONAL book entitled "The Jungle". Sinclair's purpose for his novel was to falsely portray the horrid working conditions in the Chicago meatpacking industry and promote socialism. Sinclair's fictitious accounts of working conditions in the meat packing plants were surpassed only by approximately twelve pages in his book, where Sinclair leaves the impression that humans would fall into the vats, along with rats and other vermin and then be processed into the meat products used for human consumption.

The public paid little attention to the socialist theme of the imaginary horrid working conditions in Sinclair's book, but the public did latch on to his fabrication of the insanitary conditions of how meat was processed. With the Cuban "tainted meat" scandal still on the public's mind, there was a cry to reform the meatpacking industry. Europe actually banned the importation of American meat, which damaged the American meat industry. To ease Europe's false fears, Teddy Roosevelt (TR) enacted several pieces of legislation that resulted in the Pure Food and Drug Act.

Sinclair was disappointed the public ignored his concoction of horrid working conditions, but did take notice of the fable of the horrific method by which the Chicago meatpackers processed meat. Sinclair stated "I aimed at the public's heart; and by accident I hit it in the stomach".

Was there any justification of Sinclair's assertion of unsanitary conditions in the Chicago meatpacking industry? Not according to the report from the Department of Agriculture's Bureau of Animal Husbandry, which actually refuted Sinclair's allegations point by point, using phrases like: "willful and deliberate misrepresentations of fact," "atrocious exaggeration," and "not at all characteristic." Along the same lines, Teddy Roosevelt stated his opinion on Sinclair and his book: "I have an utter contempt for him. He is hysterical, unbalanced, and untruthful. Three-fourths of the things he said were absolute falsehoods. For some of the remainder there was only a basis of truth." 

The prevailing myth at the time, and sadly even today, as Cordray's opening statement illustrates, is prior to the writing of "The Jungle", there were no inspections of meatpacking plants. Again, not true. For over a decade federal, state and local inspectors routinely inspected meatpacking plants with only minor complaints. Moreover, two million visitors a year toured the Chicago plants with no mention of the "horrid sanitary conditions" described in Sinclair's "The Jungle". The entire scenario was a fabrication.

The point is the Pure Food and Drug Act was not initiated because of "public exposure to the filth in the meatpacking industry", but rather to relieve the fears created by a FICTIONAL novel written to promote the socialist agenda, and more importantly to assure Europe that American meat was safe.

I remember being taught in high school, and indeed even college, how the "The Jungle" was the primary reason we have safe meat today. Sadly, this myth is still alive and well and perpetuated by educators and government officials from both political parties. More importantly, fabrications such as "The Jungle" are often the prime justification for government regulations and oversight.

There is also a lesson to be learned from Cordray's next statement. "Almost a half-century ago, it took the discovery that safety was taking a backseat to comfort in the auto industry to establish the National Highway Traffic Safety Administration". I love his false representation of history that "Safety was taking a backseat to comfort". Cordray would do well to reexamine his belief system, if not his facts. What Cordray is describing is not the negligence of the auto industry in providing a safer product, but more accurately an example of Spencer's Law.

In a nutshell, Spencer's Law states that when a social problem is prevalent or widespread, the least amount of government attention is paid to it. However, when the problem begins to decline or even eradicated, politicians will step in with "This is an outrage" and pass regulatory legislation addressing the diminishing issue, then take credit for what was taking place naturally.

Let's examine the auto industry as an example. Was safety the main concern of early automobile manufacturers? Of course not. Why? Because at the time safety was not really an issue. Were auto manufacturers making "safety take a back seat to comfort"?. If you accept Cordray's statist portrayal of history they were. Should the federal government have intervened and demanded that all cars be equipped with seat belts and airbags in the early 1900s? Of course not!

Let's fast forward to middle of the 20th century to the time when Cordray asserts that "safety was taking a backseat to comfort". When the auto industry solved the problem of individual transportation being made affordable to all, the safety problem was addressed.

In the early years of the auto industry, wrecks were not only infrequent, but their magnitude was small. However, as the auto industry grew, more and more individuals were purchasing cars which were capable of going at higher and higher speeds. At this point, accidents were not only more common, but also more harmful and injurious.

The auto industry started addressing the safety problem in the late 1950s and early 60s. For example, Ford introduced a collapsible steering wheel and padded dash. Safety glass was becoming the norm prior to government intervention. Car frames were being designed to absorb the force of crashes.

The safety innovations of our automobiles were the brain child of car manufacturers, not a government bureaucracy. Yet, we are led to believe by the statists like Cordray that without government intervention, our auto industry would still be producing cars without safety as a concern as they did in the early years of the auto industry. Not so.

Conclusion: Myths and fabrications have always been the prime motivation for politicians forming regulatory agencies to "protect" us. Moreover, these myths are perpetuated in our education system, both primary and secondary, as well as our political structure. The Consumer Financial Protection Board is no different. Like the Pure Food and Drug Act and the National Highway Traffic Safety Administration, the CFPB was created based on a "crisis" created by politicians, and actually designed by the very politicians who were instrumental in creating the financial crisis; Chris Dodd and Barney Frank.

Government agencies are created to solve a "crisis" which is based on fictitious facts, or a "crisis" which is in decline, not because of politicians protecting us, but because of innovations produced by the market. As long as we let politicians and bureaucrats bombard us with myths and falsehoods as excuses for controlling the economy, bureaucracies like ICC, EPA, FDA, etc will continue to justify their existence under the guise "protecting us".

Once established, bureaucracies will grow and expand to the point where they virtually make laws without approval of Congress. The process has evolved to the point where with a stroke of the pen, a president can issue an executive order that will even by pass the regulatory process. We have seen the Draconian regulations coming from the FDA and EPA. We can only surmise what will come from the CFBP, which like other bureaucracies was created to "fix" another crises, which was actually created by government policies. Nothing has changed, has it?

If you have questions or comments, CONTACT ME Tom Henderson /a.k.a. THE NOTE PROFESSOR .

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