Question: After refinancing my house with a low-rate, conventional 15-year mortgage, I received an offer to set up bi-weekly or weekly payments. What are the benefits and pitfalls of such a plan? Ron, Richmond Hill, GA
Answer: The benefit of a bi-weekly plan is it's an easy way to accelerate mortgage payments. By paying half of your monthly payment every 2 weeks, the bank gets the equivalent of 13 monthly payments instead of 12. You own your home faster and pay less interest without putting much of an additional strain on your budget. (The same holds with going weekly, but I'll keep my comments to the more common bi-weekly payment schedule.)
For example, I assumed you had a $100,000 mortgage at a 4.5 percent interest rate and 15 years to go. With a bi-weekly payment schedule, you'll own your home in 13.5 years and save $4,193 on interest compared to making the monthly payment over 15 years.
The typical drawback to this payment scheme is a big one: fees. A bank or mortgage servicer often charges a hefty upfront fee, an ongoing fee or a combination of the two to establish the bi-weekly payment account. I would check to see how much it will cost you. You can make bi-weekly payments on your own without paying any additional fees, assuming your bank allows it (not all do). You could also make a 13th payment on your own every year, telling the bank to put the money toward principal.
Unless the fees are minimal to non-existent, I like the DIY approach. I don't see why banks should charge a fee for getting an automatic payment that returns their money faster.
However, I have had people come back at me and say they're incredibly busy, they like the idea of getting rid of the mortgage early and the charge is well worth it. I think that's fine. I just want you to know that you can accomplish the goal without paying a fee.