Getting Personal
The Bi-Weekly Mortgage Payment
Question: I have a monthly mortgage of $786.33. I've been offered a deal where I pay $394.17 every 2 weeks, or $1 more per month. They state I'll save $33,039.25 and knock off 8 years and 11 months. It sounds like a wonderful deal. Is there something I'm missing? Why would the mortgage company want to save me this money? Thanks, Mark
Answer: I can think of two reasons. The benign reason is that lenders are responding to the desire of many customers to shorten the life of their loan, and this is one among several options. Taking out a 15-year mortgage is another common tactic. The other reason for the service is that it's profitable. Lenders have made a nice sideline business setting up this kind of program, and they usually charge an initial registration fee and a stream of ongoing charges.
Since you're paying back principal faster through a bi-weekly payment plan, the life of a traditional 30 year fixed rate mortgage is typically shortened by about 10 years (with the program the mortgage will last somewhere between 18 and 22 years depending on the interest rate). Now, the mathematics of a bi-weekly payment means that it's the equivalent of writing 13 mortgage checks during the course of a year.
I prefer that people interested in this strategy do it themselves. It's a perfectly acceptable D.I.Y financial maneuver with no extra fees or additional charges. The easiest way to accomplish your goal is to make a 13th monthly payment on your own. (You can divide the money into a couple of payments if that eases the strain on cash flow strain.) In either case, put a note with the payment saying it's to go toward paying down principal only. By the way, another advantage of this approach is if money does get tight during the year you can always skip the extra payment.
That said, several years ago I got a similar question from a listener on the radio, and I gave a comparable answer. The next week I got a call from a woman who strongly disagreed with me. If I remember the details right, she was a single mother with a demanding job. She wisely turned as many financial obligations as possible into automatic payments. Otherwise with her hectic schedule it was far too easy to forget a bill or to put money aside in savings. She signed up with her bank's bi-weekly mortgage program because it was one less thing to worry about. It worked for her.
01/04/08 by Chris FarrellLooking for guidance on your personal finances? I'm taking your questions and answering one here each day. Just click on the "Ask a question" link to tell me what's on your mind.
Chris Farrell Marketplace Money personal finance guru
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Comments (6)
I just got this exact offer from my mortgage company, and I was wondering whether or not to do this--and then I saw your advice. I just wanted to say that I am SO thankful for all the great advice offered in this column. It is very hard to find people you can trust and who know what they are talking about. Thank you for clarifying this and offering a great alternative. Thank you, thank you!
I really like the idea of bi-weekly mortgage pmts and am doing it, as the author suggested, "D.I.Y. way". I'd say the key point of getting the most out of this option is the type of loan you have. My 30 yr fixed loan is not as benefitial as it could be - by defenition it is "fixed"- as it does not re-calculate the outstanding balance with applying each payment I make. So first years payments of my loan are loaded with mostly interest only and I have to "eat it". My previous loan was with adjustable rates and bi-weekly auto deductions(love it!) from checking acct. As I was explained by the Bank the reason why I could pay off this loan sooner was that after applying each pmt the principal and interest schedule was re-calculated and I was very motivated to pay more $$ and more often. Another advantage of this pmt plan is a smoother cash flow - in many cases it is easier for your budget to come up with smaller payments twice a month. As far as I know this type of loans are not offered with fixed rates and at this point of my life I can not afford adjustable rate so I've set up my loan with auto-pay option of extra $$ towards the principal each month and will pay off my loan about 10-12 years sooner than original 30 years schedule.
Paying off your loan early also works with most of the car loans as well. I assumed, wrongly off course, that my car loan was fixed, so I can not pay it off early. My wife did the reading and found out that I can pay more than the scheduled monthly payment. With her help I was able to pay off my car loan 1 year ahead of schedule, and save money by means of reduced interest payments.
The moral of the story ? read your contract or talk to the lender.
In 3/07 I was unemployed (14 months) and was forced to refinance and purchase a sub-prime loan product, w/ no documentation. I was told it was better than a straight sub prime because the rate was fixed for 5 years and the payments didn't get crazy for that amount of time.
Now working, I called my mortgage company today to try to set up a system to pay more than the 'minimum payment' ($1,700) but less than the interest only ($2,550), and the customer service rep. told me that it was not worth my while to try to pay more than the minimum amount. What I wanted to do is pay $2,100/month, thinking the difference of $500/month could be applied to the principal. If I could I would make the jump from paying $1,700 to $2,550/month I but can't swing that kind of decrease to my cashflow (single homeowner here).
The rep told me I couldn't afford to live in my house and wanted to transfer me to the reclaim department to take my financials, which I wouldn't allow her to do. The rep. said she was making notes on my record. Does this mean they are going to come after me? Can they?
Are there any products coming down the pike that can help sub-primers like me? Refinancing seems like it's out of the question because the property values have sunk, so I doubt the usual re-fi is a possibility.
I can't think of any honest, informed places to go for solid information. Any ideas??
I'm getting really concerned here but figure there has to be a way out of this mess.
Thank you.
Just read again Chris's reply and all posted comments - the greatest+key point of this topic is - we want to simplify our lives and make them worry- and stress-free. We definetely do not want extra expenses to FedEx our mortgage and car loan pmts to make the due date or pay late fees an damage our FICO score with missed/late pmts history. To avoid all of the above - please set up as many auto-pay options managing your finance as possible. We are living in 21 century and it is time to get rid of the papers. My 25 checks checkbook last 6-9 months...beacause I've set up my all monthly routine pmts (mortgage, utilities, phones, insurance etc) ON AUTO PAY - so I do not have any more headaches. Just make sure you have enough $$ on your checking acct to cover all your monthly pmts. Trust me - it works and saves SO MUCH time for better things in life!
It was a strange experience to receive offers to set up biweekly payments (for a fee) when I moved to the US several years ago. Coming from Canada, I had always made bi-weekly mortgage payments as they were an option when you take out the mortgage. But then, almost all Canadian mortgages are the equivalent of 5 year ARMS with limited prepayment options.
I was not about to pay someone a fee to arrange for my payment to be bi-weekly rather than monthly. Also, I'll avoid taking out a mortgage with any prepayment penalties.
It is easy to set up a separate free checking account with you bank or an internet bank (like ING). Every payday, I have an automatic transfer of about 55% of my mortgage payment to this account. Then I set up automatic payments on the mortgage on any schedule I wish from this account, allowing for any additional payment. I simply add a second payment on principal every month. Just about evey bank offers some form of free bill pay and a number of 'free' checking accounts so anyone with an income can try do this.
You don't need a lot of cash-on-hand (although it is nice) to do this and all the additional energy is expended in the initial set up. Once set up everything is pretty much automatic. I get several benefits from this set up.
I start to build a bit of a home account and I get ahead of the game (just a little bit) every payday. The account balance will grow slowly but steadily. Remember, we are talking about mortgages here - think in years. A year or two later it is really comforting to see that you have a surplus that can be part of the emergency fund to cover mortgage and other house expenses if needed. Hey, and you also get paid interest :)
I don't see the money ( for very long :) ) in my working accounts so I don't rely on it for day-to-day living.
I get the benefit of the biweekly payments but I get to manage the schedule as I please. If there is extra cash in the account at the end of the year, I can apply it to the mortgage, if I wish.