You’ve received a letter offering to save you tens of thousands of dollars -- if you sign up for a bi-weekly mortgage program. Your cost? A one-time fee of about $300-400. That’s gotta be a great deal, right? Let's take a closer look.
JUST WHAT IS A BI-WEEKLY MORTGAGE?
The so-called bi-weekly mortgage usually isn’t really a mortgage at all, but a program that might be administered by your bank or some other entity. Most of these programs do not actually change your mortgage in any way. You’re still bound by the rules of your loan agreement, however your bi-weekly program administrator may require you to sign a contract binding you to the terms of the agreement.
With a bi-weekly mortgage you give permission to the administrator to debit to your bank account every 2 weeks in an amount equal to one half of your regular monthly payment. Most people think that they’ll get interest savings by having the payment applied earlier but that’s not the case. The real reason your bi-weekly program can save you so much is because making a half payment every 2 weeks gives you 26 half payments per year - the equivalent of 13 monthly payments, not 12. The savings comes from making an extra payment every year. While a large percentage of your regular payment goes to interest, 100% of the extra payment goes towards your loan balance. This can result in paying off a 30 year loan in about 22 years and an interest savings of around 30%.
So maybe you’re thinking this seems like a pretty good idea, why shouldn’t you sign up - so long as you can afford the equivalent of an extra payment each year and you don’t mind allowing them access to your account? Well, there’s the initial sign up fee; plus, you'll probably be hit with a service charge of $2.50 or more every two weeks, for the next 20 years or so. By the time your loan is paid off, that'll put another $1,300 or so of your money into the administrator's pocket....
Although they electronically transfer funds every two weeks from your bank account, the bi-weekly profiteers simply send the bank your required mortgage payment once a month -- just as you always did.... Once a year they make the extra payment but they hold and earn interest (float) on the additional money until they have enough to make that payment.
While they claim to offer something special, the truth is that anyone can easily have these savings without all those fees and charges, and without any contracts or plan administrators.
DO I HAVE THE RIGHT TO DO MY OWN BI-WEEKLY MORTGAGE?
In a word, No. If your note calls for monthly payments, then you don’t have the right to make them bi-weekly. However, you can do what your plan administrator would do: place your bi-weekly payments into an account and make the monthly payment. The balance in the account will gradually rise and after 12 months there will be enough to make a double payment. Just make sure your extra payment includes a note stating that the extra payment is to reduce principal, not an advance payment for the following month.
You can save the initial fee and all the bi-weekly transaction fees by doing it yourself and for even greater savings, all you have to do is divide your current monthly mortgage payment by twelve, and send in that amount as a pre-payment with each month's payment.
Say you have a required monthly principal & interest payment of $900. Divide that by twelve, and you get $75. Send in a pre-payment of $75 every month along with your mortgage payment, and you'll save more than you would with their plan because you’ll start applying funds towards principal immediately, not after waiting 12 months to build up enough for an extra payment.
If you don't trust yourself to send in the pre-payment each month, ask your lender to automatically withdraw it from your checking account once a month.... It doesn’t have to be exactly 1/12 of your monthly payment. Anything is better than nothing. The larger the pre-payment and the sooner you start making them, the more you'll save.
Check with your lender first to see if making principal payments early will result in pre-payment penalties.
