Bi-Weekly Payment Programs
The billboard or TV commercial reads, “cut thousands of dollars off of your mortgage by converting to a bi-weekly payment plan!” Sounds too good to be true, doesn’t it? Well, it’s actually mostly true. A bi-weekly mortgage payment plan restructures your payment schedule. Instead of the traditional, one-payment-a-month mortgage payment, you make a half-payment every two weeks.
Bi-Weekly Payment Plans Mean More Money Paid to Your Principle Each Year
Think about it this way: there are 12 months in a year and if you make two half payments every week, you would be making a total of 24 payments during the course of the year. There are also 52 weeks in a year, and if you made a “half-monthly” payment every two weeks, you would be making a total of 26 payments during that year. Assume your monthly principal and interest mortgage payment is $1,000 a month. Normally, you would pay $12,000 a year, right? In a bi-weekly payment plan, you are effectively making two extra “half-payments” a year (26 minus 24), which is equal to one full monthly payment per year and you would be paying a total of $13,000 instead of $12,000 over the course of the year. If you make sure that your extra payment is going towards paying down the principal on your mortgage, you will shorten a 30-year mortgage to about 5 to 8 years, depending on your interest rate.
Payments Can Be Automatic and Timed With Your Paycheck
This idea appeals to many borrowers, especially because many people are paid every other week and the lender can set the payment up to automatically transfer your payment from your bank account. This also has a positive emotional impact on the borrower, as they feel that they are being responsible and proactive about paying off their mortgage early. Sounds great, right?
Costs to Set-up
Yes, it sounds great, but as the old adage goes, if something sounds too good to be true, it probably is. Setting up a bi-weekly payment program can cost you $300 - $500 or more on both a new loan or if you wish to convert your current loan into a bi-weekly payment schedule. Also, your lender will most likely charge you $4 - $5 for each and every payment transferred from your bank account. Don’t get me wrong, I am all in favor of paying down your mortgage if you are able to accelerate your payments, but there is absolutely no reason to enter into a bi-weekly payment program. Here’s why:
Set Up Your Own Bi-weekly Payment Plan
You can easily set up your own bi-weekly payment plan. All you need to do is take your monthly mortgage payment ($1,000 for example) and divide it by 12. That comes to about $83. Send in an extra $83 every month ($1,083 total) and you’ve effectively reaped the benefits of a bi-weekly mortgage without the hefty conversion/start up fees or the transactions fees. Another way to shorten the term and reduce the total interest paid on your mortgage is to send in one full extra payment a year (13 total payments instead of 12). This may make sense if you receive annual bonuses or are paid in lump sums or commissions as opposed to hourly or salaried employees. On a $150,000 mortgage, bi-weekly payments will save you about $40,000 in interest over the life of the loan!
Requires Discipline
These methods described require a certain degree of self-discipline. Also, if you don’t plan on staying in your home for the remainder of your mortgage term, you may lose some of the benefits of continuously paying down the principal over the period of 30 years. Just remember that the advantages of a bi-weekly mortgage can be yours without involving a third party or forking over large fees.
