On the heels of our recent mortgage refinance, we’ve been inundated with mortgage-related junk mail. Among the most common pitches that we receive are offers for bi-weekly* mortgage payment programs.
Almost without fail, these missives are disguised as official-looking notices proclaiming things like “NOTICE OF INTEREST OVERPAYMENT.” They also list the lender’s name at the top, though they indicate in a footnote that it’s listed “for reference only, ” and that they have no relationship with the lender. Rather, your loan information “was obtained through public record.” Clearly, these folks want to get your attention, and they don’t mind mis-leading you along the way.
What is a biweekly mortgage payment plan?
In short, biweekly payment plans are designed to help you pay off your mortgage as much as six to eight years early. That’s the good news. The bad news is that these plans come at a price. Enrollment fees are typically in the $300-$400 range, and some companies charge additional fees on each transaction.
How do biweekly mortgage payment plans work?
You normally make a monthly mortgage payment, resulting in a total 12 payments per year. But what if you were to make a half payment every two weeks instead of a full payment once per month? Given that there are 52 weeks in a year, this works out to 26 half payments, or 13 full payments.
So… This is essentially a fancy way of getting you to make one extra mortgage payment per year. By doing so, you’ll build equity faster, pay less in mortgage interest charges, and close out your loan well ahead of schedule.
Are biweekly payment plans really necessary?
The short answer is no, you can do this all on your own for free. While proponents might argue that these plans add discipline to your early payment plans, you can achieve much the same thing by automating your payments.
Some simple alternatives
(1) Call your lender and ask them if they can handle a half payment every two weeks. Some can, others will charge you for this service, and still others will flat out decline (or get confused). Assuming that they can handle it, you can (and should) automate the payments through your online billpay.
(2) Pay an extra 1/12th of your mortgage every month. With online billpay, you only have to set this up once. While it’s a good idea to designate that the overpayment should go toward principal, every lender that I’ve dealt with will handle such payments properly even without further instructions.
(3) Open a high-yield savings account and deposit half your mortgage payment into it every two weeks. Make your payments from this account and periodically apply the excess (plus interest) to your mortgage.
Of course, this all ignores the larger issue of whether or not you should pay off your mortgage early in the first place, but… That’s a topic for another day.
*Note: Biweekly can mean twice a week or every two weeks. Here, we’re talking about the latter.
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If you were able to do so $$ wise (and still be comfortable) could you still just make your monthly payment but add a little extra $$ to be applied to the principle and it do the same thing (vs paying twice a month)?
I find this information very helpful. I was a little leary about participating in the semi-weekly program. I get three checks monthly, two small checks.
I would still like to pay my mortgage off 5-6 years earlier, but I’ll have to give this more thought.
Good post!
Paying your monthly every 2 weeks in 2 payments make a lot of sense financially. You end up saving interest on interest over the term of you home loan. This is significant money folks!
If you existing home loan bank doesn’t offer this possibility, well, you should really think about moving to another one because you’re simply giving them too much money. Think about it; if they don’t it’s simply they want you to pay them more. And that’s not a good deal for you.
Great post and good analysis. I did a post on this topic – Pay your Mortgage up to 7 Years Earlier – and definetly think you can pay your mortgage off sooner and for free using this method or variations of it.
Andy.
I just decided to pay extra on my monthly mortgage towards principal payments. I think this is a more effective way to go about it.
Also, by paying bi-weekly, what you are doing is simply making more payments a year than if you paid monthly. If you took that extra payment at the end of the year and use it to reduce your principal, you will pay off your mortgage slightly faster.
Maybe mortgage payments are different but I would advise that you don’t assume an extra payment gets applied to principle. I’ve had experience with both car and student loans where my wife and I made extra payments that weren’t applied to principle. Instead the payments were applied to the next payment due. We didn’t even realize this until a statement came in saying we were paid up for the current bill.
Sometimes all it takes is writing “apply to principle” on the check but other times you need to send the payment somewhere different. Make sure you check with your lending company before you send in extra payments.
I use a combo of option 2 and 3 myself. I use an online billpay which pays a higher interest rate than my credit union checking account.
Every two weeks, when my paycheck gets direct deposited (I acutally initiate it the day before), the $$ amount of 1/2 my monthly expenses gets sent in. Then on the 10th of every month my mortgage gets paid, but since my mortgage holder (Wacovia) doesn’t take 1/2 payments, I pay the 1/12 amount extra. Over the course of the year 13 payments are made.
I have been kind of generous with the 1/2 $$ amount so I have actually been accumulating extra in this account. I might be able to add a 14th payment soon.
I worked at a mortgage company (Rhymes with Chase) where third party vendors offered these bi-weekly plans (BTW, the mortgage companies get paid $$ for allowing these servicers to solicit their client base, more if they subscribe).
Couple of problems people always ran into:
Most of these plans require you to set the plan up with $$ BEFORE they send the first monthly payment to the mortgagee; SO, you need the equivalent of 2 mortgage payments to get started: one to keep you mortgage current, one to set the vendor up.
These vendors never explained that very well, so 60% of the people who signed up for the program were one month behind on their mortgage from the get go; I know this because SR management asked me to run a query to find a link between subscribers to the service and loan delinquency
As Chris has illustrated above, mortgage companies do not accept partial payments, so before long these people were several months behind on their mortgage when (or if) they ever figured out how they got behind. By the time they paid late fees, an extra payment to catch up and all the other issues, it cost some people serious $$ and a few never caught up.
Behind the scenes, the vendors would be making the same 12 month payment schedule plus 1/12 extra every month. The same thing an organized person could have done without paying the $400 set up fee. In fact if every person had just paid the $400 towards principle and budgeted an extra bit every month, they could have saved much aggravation and ended up ahead.
Also, what do you do if your employer changes your paycheck schedule or you switch jobs to someone who pays bi-monthly or weekly?
Not a great service.
only good if you get paid every two weeks. but when your a government employee like me, you get paid monthly, and you don’t have a 401k either, although they have some 401k-like programs.
Rick: You’re mistaken. It actually has dual meaning. From the Random House Unabridged Dictionary:
bi-week-ly
1. occurring every two weeks.
2. occurring twice a week; semiweekly.
I just go the paying extra against the principal every month. I always pay at least an extra 8% towards principal, usually an extra 16% to 33%, and now and again an extra 83% towards the principal.
As a result, our mortgage debt is dropping quite quickly. As it is far and away our highest interest rate it makes sense to apply our spare money each month against it. Our only other debt is student loan debt.
It’s funny you bring this up. I just tried doing this with Wachovia. I use E-bill pay with TD banknorth and sent in 1/2 my mortgage on 4/10. Just yesterday, I received an official letter from Wachovia stating that they do not allow this. It said that this time they would let me make the other half of my payment this month (thurs) but not to do it again and that if I did, my funds would be returned to me. I can’t see why they won’t go for it. Oh well.
Strictly speaking, “biweekly” means every two weeks, and “semi-weekly” means twice a week.
(4) (Assuming you get paid every two weeks or every week), send in some extra money each month that you get an extra paycheck (and make it clear that this is to go toward interest).
(5) Put some extra money anywhere – high-yield savings account, stock market, bonds, etc. As soon as you have the amount of your remaining principal, request a a pay-off figure (which they claim will not be the same as the remaining principal, but it really is–I requested one and there were no added fees or anything) and then pay it. Or don’t pay it, but know that you could.
Hi Nickel – I personally like option #2 the best. I get paid twice a month (yes, it makes a huge difference) and paying a mortgage every 2 weeks is impossible twice a year – those 2 months that I would have to make 3 payments. I’ve opted to make an extra 1/12th payment every month.
It doesn’t look like much at first, but check this out: link
An Excel template where you can see the effect of extra payment on interest and the amount of time you will pay, etc. I’ve been advocating this template every occasion I get 😀 cause I love it!
This is a principle I apply to my entire budget. Because I get paid bi-weekly, it makes sense to simply add the additional income on top of each of my budget categories. This equals out to an additional months worth of income every year across the board for each of my savings and spending categories.
Nice, Eh?