One extra payment is essentially made each year, thereby slashing interest costs by shortening the life of the loan. Or, they can add a little something extra to their regular monthly payments on their own.
Critics say that's a waste of money, plus borrowers are locked into a stricter payment schedule.
But plan administrators maintain most people lack the discipline to make extra payments on their own, and whatever fee is charged, is a small price for something that ultimately could save loads of money. Lenders have been pushing the prepayment strategy lately, and a growing number of third-party collection companies have been springing up to cash in on this hot home loan product. Some lenders have even promoted biweekly mortgages as a less-expensive alternative to refinancing. Instead of making the usual 12 monthly payments per year, borrowers make 26 twice-monthly payments, each of which is half the size of the regular monthly payments. That adds up to 13 full payments a year.