You may have gotten emails or seen advertisements for bi-weekly mortgage payment plans and wondered – is this just another scam or a legitimate way to pay off my mortgage faster?
How bi-weekly plans work
The basic principle of bi-weekly mortgage plans is that instead of say, paying $3,000 each month for your mortgage payment, you pay $1,500 every two weeks instead. By doing this on a 30 year mortgage, they claim that you can pay your mortgage off as much as seven to ten years earlier than with a regular repayment plan!
On the surface, the bi-monthly mortgage payment plan does not seem to make any logical sense. How is it that your mortgage is paid off faster, through magic? Well, if you break down the plan into how much you will be paying each year, you might be surprised. Believe it or not, there is some truth to the bi-monthly payment plan.
- There are 52 weeks in each year; therefore if you were to make the bi-weekly payments, you would make 26 payments.
- If you are making 26 payments of half of your monthly mortgage payment, it is as if you are making 13 monthly payments toward your mortgage each year.
- The bi-weekly mortgage payment system allows you to fit an entire extra month’s worth of mortgage payments into each year.
Let’s break that down these numbers so that you can follow along more closely:
If you make the $3,000.00 per month payments now, over the course of a year, you will make 12 payments, totaling $36,000.
Now, if you make bi-weekly payments of $1,500.00, over the course of a year, you will make 26 payments, which totals $39,000.00.
The extra $3,000.00 that you pay during the year goes directly toward paying off the principal balance of your loan, and therefore your loan will amortize more quickly and require fewer payments.
The fine print
Please understand that you cannot just start paying bi-weekly payments to your current mortgage company. They cannot accept your partial payments for legal reasons and they will just return your check.
The way these bi-weekly mortgage programs work is that a third party intermediary between you and your mortgage company is established that will process the transaction. There are usually fees to setup the program as well as transactional fees each month – the amounts of which may vary.
If you decide to pay your mortgage through a bi-weekly mortgage plan, the company withdraws your payments into a trust every two weeks, and forwards a payment to your mortgage company every month. Since you are putting funds into the trust at a faster rate than what is needed for your mortgage, once a year the trust will accumulate enough funds to make that extra 13th payment each year.
A few words of advice
Now, please understand that we are not endorsing bi-weekly mortgage plans or suggesting you enroll in one. The purpose of this article is merely to educate you on what they are and how they work.
I will, however, offer a few words of caution. Because in this case, your funds are being handled by a third party, you should make sure that you are working with a reputable company, and at the first sign of any problems, you should confirm that your mortgage company is receiving your payments.
Additionally, if you have a bit of financial discipline you don’t even need a third party to start your own bi-weekly program. Instead of hiring a company to manage your bi-weekly payment, you could setup the same thing on your own for free. Just take your monthly payment, divide it by twelve, and add that amount to your monthly mortgage payment – but make sure to designate it as a principal reduction.
If you have specific questions or would like to learn more about your choices for mortgage loans please contact me for a review and consultation.