Forget Biweekly Mortgage Payment Plans

For people wanting to pay off their mortgage early, a biweekly mortgage payment plan is a popular solution. Some details on these plans:

Normally, you make twelve mortgage payments a year. Since there are fifty-two weeks in a year, a bi-weekly mortgage equals 26 half-payments a year. The equivalent would be making thirteen mortgage payments a year instead of twelve. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments.

But Bankrate that suggests we all forget biweekly mortgage payment plans and simply make the extra payments ourselves:

I'm not a fan of biweekly mortgage payments. They don't do much for you, and they tend to cost a lot in fees and expenses. You can do as well on your own by making an additional principal payment each month with your current mortgage.

This is what we did when we paid off our house. We simply added an extra payment here and there as money came in from bonuses, gifts, savings and the like. Yes, this approach does take discipline (you need to make the payments when you have the money), but it's not all that hard is it?

Why pay for a biweekly service when you can be more flexible and have no cost by paying it off yourself?

Comments

[Hawkmoon Nine]

Completely agree here. Our lender would charge us $4 a month to do the bi-weekly payments while paying extra every month is free.

One thing that worked out good for us this year - we bought a house about 20 months ago, it was a new construction and the bank/appraiser had to estimate the property taxes, and they overestimated. So this year they revised the tax escrow account and it was $65 a month less, so we just add that to our principal every month since we were already used to paying the higher amount.

[Eric]

You are completely right on this. Before we bought our house we asked our lender about doing this and he explained how much it would cost to set it up and suggested that we simply divide the monthly payment by 12 and add that much to our regular payment each month. He also suggested sending an extra check for that amount with the memo line saying "Apply to principle". After trying this several times we noticed that it was the same whether we did it on 1 or 2 checks, so we just sent one. Now we do it online.

[Jonathan]

My lender (Citi Mortgage) charges a $375 fee to set up a bi-weekly payment plan. No thanks. I just add 10% onto my monthly payment, instead. That works better with my monthly paycheck, anyway.

[DrToast]

Why would you make extra payments on your mortgage at all? It doesn't reduce your monthly payment. Yes, you'll pay it off quicker, but why not take the extra money and save it until you can afford to pay off your mortgage in one lump sum? You'd be able to pay off your mortgage even quicker that way because your money has earned interest along the way.

Making extra payments is essentially giving the bank a 0% interest loan on your money until your mortgage is paid off.

[Brad]

DrToast, that's not true. Putting money into your mortgage earns YOU interest in the form of reduced future interest payments. Unless the savings/investment you put the extra money in returns at a better rate than the interest on your mortgage, you would not come out ahead doing it that way.

With that said, there are a lot of people (myself included) that prefer to pay minimums on the mortgage because the rate is low (and the tax break helps) . . . so putting money in the market is likely to make us richer in the end . . . but of course this is not without risk.

Personally if the return is even, I'll keep the cash. Only if my mortgage interest rate is substantially higher than what I can earn risk-free would I ever consider paying extra on my mortgage as an investment.

[DrToast]

Brad,

I'm not sure you follow. I'm saying that if you want to pay off your mortgage early, you should not do so by making extra monthly payments along the way. That doesn't change your monthly payment, so why give the bank your money? You're better off saving your money until you have saved enough to pay off your mortgage.

Those "future interest payments" you refer to aren't saved until the mortgage is paid in full. And you'll get to that point sooner by saving your extra payments yourself and then making one final mortgage payment when you have enough to pay in full.

[Skott]

The payment stays the same but more of it is applied to principal as the balance gets lower (less interest piling on each month). Maybe you should explain how, mathematically, you will "get to that point sooner by saving your extra payments". Is it a substantial difference?

[Ryan]

You are both wrong. If you are planning on paying off your mortgage early, you should simply get a 15 year term mortgage instead of a 30 year term mortgage since the interest rate on a 15 year note is lower than that on a 30 year note. If you were planning on making extra payments anyways, why not get a lower interest rate to boot?

[Griffin]

Our lender offered a free bi-weekly payment program -- direct with them; no fees, no charges, no nothing. We now pay 1/2 our usual monthly payment every two weeks. From a cash flow perspective, this is great since I get paid every 2 weeks. Our lender is now amortizing our loan on a bi-weekly basis -- we had about 11 years left on our mortgage and now the loan will be paid off in about 10 years. So this is beneficial to us for two reasons: 1) better cash flow management; and, 2)a (slightly) shorting amortization schedule. And since I'm not paying more per "month", I'm in effect paying 13 times per year without it feeling like I'm doing so. Our interest rate is less than 5% so I couldn't see the point in paying it off faster using extra payments -- I'd rather invest the money at a higher rate and home equity isn't liquid.

Most of the bankrate info referred to third parties handling the bi-weekly payments. I would never pay to do this. In fact, our lender used to charge to change to this plan which I wouldn't do. I agree with the earlier comments about either paying extra each month if you want to pay down your mortgage quicker. I used to pay my mortgage every four weeks, but I didn't get credit for the early payments with my lender. Once a year, when I was a month ahead, I'd be able to skip a payment -- or make an extra principal payment. The bi-weekly process is much smoother.

[Julie]

We pay our mortgage biweekly. In addition, we increase our monthly payment amount by 20% once every year. The extra 20% we pay, goes directly to paying down principal. We also add lump sum payments every six months. All three methods decrease our mortgage principal.

Mortgages are an expense, no matter how you look at it. Once the mortgage is paid off, you can use the mortgage payment for other purposes. All other bills come every month. This is one bill you can eliminate so why not do it? For most of us, saving the extra money and using it to invest simply won't happen. Any extra money goes to consumption. Far better to put the consumption money towards debt reduction and then, once the debt is paid, use the money for consumption.

This is a simple way of doing things perhaps but it works. Pay your mortgage off within 10 years maximum. Then buy another home. Use the first home as a rental property. Use the rental property money to pay the second home mortgage property. This is what we are currently doing.

In Canada, there are no fees associated with setting up a biweekly payment plan, for increasing mortgage payment amounts or for lump sum payments up to 20% of the original principal amount. It very simple to pay off a mortgage in 10 years: just do it.

[Rich Schmidt]

Our Wells Fargo home mortgage offered the biweekly option for free. No setup or monthly fees. No fees at all. So we're doing it. We just made our first extra principal payment at the end of June.

I suppose we would come out ahead if we just set that money aside ourselves and invested it until it grew to the point where we could pay off the mortgage in one fell swoop. But we're not quite that disciplined. So this ends up helping us immensely without costing us a dime in fees. I'm willing to forgo the potential interest on money I might otherwise have spent. :)

[Cory]

Who pays extra for a bi-weekly payment plan? I just get it taken out bi-weekly and I don't pay any expenses or fees.

[Dr. Housing Bubble]

I totally agree that bi-weekly programs are a waste of money. All you need to do is:

(Monthly payment)/12 + (Monthly Payment) = Your New Monthly Payment

You'll need to ensure that your bank or lender takes the extra payment and knocks down your principle balance. It'll take you 30 seconds to get this done and cost you $0.

[Demeter]

Wow, I didn't realize how good we've got it. We bank with a small credit union, and they don't charge us anything at all to pay our mortgage any way we see fit. I used to pay a half-payment each bi-weekly paycheck, which did result in an extra payment per year. Now my husband gets paid weekly, so I pay slightly more than 1/4 of a payment (I round it up to an even amount) each week when the direct deposit hits. My online banking only costs $1/month for everything.

If we ever decide to put a large extra amount to our mortgage, I'll make it a special "apply to principle" payment, but for now I just pay it like normal, even though I am paying a few extra dollars above the minimum each month. Trying to get those few dollars applied to the principle would be more trouble than it's worth.

[Blaine Moore]

I just put extra towards principal - I just calculated, and the _minimum_ extra that I put towards principal every month is $8 more than 1/12 of a payment (including escrow, so well more when just considering principal & interest). Most months, I put more than the minimum that I add on; usually, twice as much, but sometimes as much as 10 times. We did an 80/4/16 mortgage(s) (mortgage/mortgage/down payment) and the 4% mortgage is already paid down by a third in the first year and a half (less than, really).

Once we are on two incomes again then we will probably refinance into a 15 year w/a lower rate, but right now we couldn't do that w/o mortgage insurance so we don't bother.

[Colleen]

Or the next time you refinance you do so through your credit union - which we did three years ago. (We also got a great rate of 4.75) There were no extra fees and the credit union deducts the payment out of my husbands paycheck every payday. This is one bill I don't need to worry about making on time! Our house will be paid off in not 15 but 12 years since it is biweekly, and at this time we have 9 years to go!

[Lin Ennis]

Here's another way to achieve similar savings--about seven years, depending upon loan variables. And this option is totally free and under your complete control whenever you want to use it or not.

1) Divide your monthly payment by 12.
2) Add 1/12th to each month's payment, specified "principal only"

In a year's time, you will have achieved the same "13 payments per year."

Here's an example. On a payment of $1000/month, normally a year's payments would be $12000.

Adding $83.33 a month to principal only, makes 13 payments a year. And the best part about it is, the $83 a month reduces principal every month! (Your year's total is pennies under $13,000.)

--a friendly tip from the author of Let Your Mortgage Make You Rich

[Franklin mctyre]

Remember ,also when you get your house paid down by 20% look at refinancing and controlling your own escrow put in account earning interest instead of mortgage company that is if you get a better interest rate.

[Dawn]

When you do the biweekly, YOU ARE NOT ACTUALLY PAYING ANYMORE THAN YOUR NORMAL MONTHLY MORTGAGE PAYMENT, but are getting the benefits of having paid an extra payment each year.

Of course, if there are fees involved, that is something one must consider. However, the fees, even is it is $375 to set it up, is less than the thousands of dollars you can save in interest over the life of your loan! $375 fee AND the same payment without having to pay an EXTRA PAYMENT. No-brainer! Most people are not disciplined enough to pay the extra payment and with biweekly, you don't have to but you get the same benefits!

The upside? My mortgage will be paid off 2 years earlier and I DIDN'T HAVE TO PAY ANYMORE EXTRA! Paying an extra payment each year is NOT the same as a biweekly payment schedule b/c you are shelling out an extra mortgage payment each year (13 instead of 12), I am only making a total of 12 payments ~ they are just split up into 24 payments) and getting the same effect as you! I use the extra mortgage money to go on vacation!

[snivel]

The Wells-Fargo's bi-weekly plan is a LOT deceptive and, in my opinion, borders on fraud. It should
be called a “Bi-weekly, we'll take the money out of your account, not pay you interest, and only make the actual the payment when we have collected 2-bi-weekly payments from you!” plan.

The only benefit is the fact that you make one extra payment annually and these payments (week 25 and 26) go directly to outstanding balance (principle). However, these are the last two payments of the year. So you derive exactly zero benefit until the last month each year. This is no different than if you had simply made a single additional payment yourself. A better plan would be for you to increased your monthly payment by 1/12 of the payment amount to be applied directly to principle on a monthly bases, thereby reducing principle amount much sooner. (the longer you owe it, the more it costs you).

A true bi-weekly plan makes actual payments towards your mortgage (principle and interest) every two weeks, thereby reducing your outstanding balance slightly with each bi-monthly payment. If you calculate and compare, you will see that you truly save more money in this fashion.

So, your best bet is to stay away from these clowns; focus on refinancing at the lowest rate (if applicable), and make additional principle payments when ever you can. Keep in mind that a large principle payment is most beneficial in the early stages of the loan.

Dissatisfied with Wells-2Far2go to make it worth my time.