Could you benefit from a Bi-Weekly Mortgage Payment?

There is not a month that goes by that I don’t get this question asked of me – “Is it smart to sign up for a bi-weekly mortgage payment?” Before answering, let me make sure you understand what a bi-weekly payment is and what it does. A bi-weekly payment simply takes your current mortgage payment (the principal and interest part), divides it in two, and then automatically collects that amount once every two weeks. So in effect, you pay 26 half payments a year – or 13 total payments. Doing this allows you to pay one extra payment per year, thus reducing your loan balance, and ultimately the term of your loan – on a 30 year term, this will likely be between 7 and 8 years knocked off the term of your loan. On the surface this seems like a great thing! But not so fast….

I’ve yet to see one of these plans set up where there isn’t a charge to set it up. These plans used to charge a one-time up-front fee to set up. It was typically in the $300-350 range. Now, most of them come with a monthly fee of anywhere between $7-15 per month. So even at only $10 per month, the cost to you is $120 per year. Again, that may not sound so bad – pay an extra $120 per year for the opportunity to knock off 8 years of loan payments.

But here is the reality: YOU CAN DO THIS ON YOUR OWN WITHOUT PAYING THE FEE. I’m not aware of any fixed rate loans being done anymore that have pre-payment penalties (and even those that had them were typically only enforced if a 20% or greater principal reduction was made in a given year). You have the ability to pay as much extra as you want – anytime you want. So technically, by paying one extra payment per year, you can accomplish the exact same result as you would have accomplished with a bi-weekly payment; and you save the added fee. Granted to do this on your own, you have to have the discipline to save the money on your own, whether you make the extra payments monthly, yearly or on any other schedule.

As I’ve mentioned in the previous week’s updates, I don’t necessarily like the idea of pre-paying a low rate mortgage down below 80% anyway (at least not making extra payments once you have gotten to that level). And if you are working on paying extra to get your loan to value down to 80%, you can do that on your own, without paying to set up a bi-weekly mortgage. So for most people, I would advise against setting up this kind of a plan. Just no reason to pay a fee for something you can just as easily do yourself. But if you know that you don’t have the discipline to pay extra, and you seek to get your balance down to 80% to drop your mortgage insurance (on a conventional loan), then go for it. You are wasting money on the fee, but will certainly save in the long run.

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