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.