|
The Bi-Weekly
Mortgage - Who Needs It?
Have you received an advertisement
offering to save you thousands of dollars on your thirty-year mortgage and
cut years off your payments? With email "spam" becoming more pervasive as
everyone tries to "get rich quick" on the internet, these ads are popping
up with troublesome regularity.
The ads promote the "Bi-Weekly
Mortgage" and for the most part, do not come from a mortgage lender.
Exclamation points punctuate practically every claim:
- No closing costs!
- No refinancing!
- No points!
- No credit check!
- No appraisal!
- Save thousands!
- Cut years off your mortgage!
To achieve these wonderful savings
all you have to do is allow half of your mortgage payment to be deducted
from your checking account every two weeks. It's easy. Of course, there
is a small "set-up fee" and usually a "transaction fee" with every
automatic deduction.
Essentially, the ads are truthful in almost
every respect.
They just want to charge you money for something you
can do on your own for free.
The Basics:
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.
You save
money. The ads are true.
How it Actually Works:
You cannot simply mail in half a payment every two weeks to your
mortgage lender. Since they do not accept partial payments for legal and
accounting reasons, the mortgage company would just mail your
half-payment back to you.
Instead, the bi-weekly mortgage
company is an intermediary between you and your mortgage lender. They
automatically debit your checking account every two weeks for half of
your mortgage payment, then place your funds into a trust account.
Basically, this is just a holding account for your money. In another two
weeks, there is another automatic deduction from your checking account,
and so on. When your mortgage payment is due, your funds are withdrawn
from the trust account and forwarded to your mortgage lender.
Since you are placing funds into the trust account faster than
your mortgage payments are due, you eventually accumulate enough money
to make an "extra" payment. The way the cycle works, this occurs once a
year. The extra payment is applied directly to your principal balance,
which causes your loan to amortize faster, pay off more quickly and save
you thousands of dollars.
Potential Problems with the Trust
Account
Because your funds are held in the trust account
until your mortgage payment is due, there are potential dangers. Not
only are your funds held in this account, but so are the funds of
everyone else enrolled in the bi-weekly program. That is a lot of money.
Most likely, there will be no problems.
However, if
there are accounting errors, mismanagement, or even fraud, your mortgage
payment might not get made. The first hint of a problem will probably be
a phone call or letter from your mortgage lender, but not until after
your payment is already late. Since responsibility for making the
payment rests with you and not the bi-weekly payment company, you may
find yourself digging into your personal savings to make the payment
directly -- even though the bi-weekly payment company has already
collected your funds.
Later you can work out the trust account
problem with your bi-weekly payment company.
The Cost of the
Bi-Weekly Mortgage
There is usually a set-up fee that runs
between $195 and $350, depending on how much sales commission is paid to
the individual or company setting up the account for you. You also pay a
transaction fee each time there is an automatic deduction from your
checking account and sometimes also when the payment is made to your
mortgage lender. There may also be a periodic "maintenance fee."
Meanwhile, whoever controls the trust account is earning
interest on your money.
Savings of the Bi-Weekly Mortgage
By making principal reductions using the bi-weekly mortgage
program, your mortgage will amortize more quickly, saving you money. How
quickly your loan pays off depends on your interest rate and when you
begin making the bi-weekly payments.
On a $100,000 loan at today's
interest rate of eight percent, your first principal reduction would
probably be a year from now. Assuming the principal reduction is equal
to one monthly payment ($733.76), you would save $43,852 over the life
of the loan and pay it off almost seven years early.
However,
you have to deduct from those savings any amounts you paid in set-up,
transaction, and maintenance fees.
No-Cost Alternatives to
the Bi-Weekly Mortgage
Instead of hiring a company to manage
your bi-weekly payment, you could accomplish essentially 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. Be sure to
earmark it as a principal reduction.
The first way you save is
that you do not have to pay any fees to anyone. It's free.
In
addition to not paying fees -- using the same example as above -- your
total savings on the mortgage would be $45,904. Plus the loan would be
paid off three months quicker than with the bi-weekly mortgage. The
reason you save more is because you are making a principal reduction
each month, instead of waiting for funds to accumulate so that you can
make one principal reduction a year.
Self-Discipline?
The bi-weekly mortgage companies claim that homeowners are not
disciplined enough to follow through with principal reduction plans on
their own. They suggest the reason for setting up the bi-weekly mortgage
enforces discipline upon you, and by doing so, they save you money.
However, in this internet age, banking on line and automatic
deductions are readily available. You can set up your own automatic
deductions including the additional principal reduction and have it go
directly to your mortgage lender. Since the deduction occurs
automatically, just like with the bi-weekly mortgages, self-discipline
is not a problem. Once again, you don't have to pay anyone to do it for
you and you save even more money.
Conclusion
The
bi-weekly mortgage plans do not really do anything except move your
money around and charge you for it. Plus, even though the danger is
negligible, you must trust someone else to hold your money for you. If
you can do the very same thing for free, plus save yourself even more
money by doing it on your own, why pay someone else?
The
bi-weekly mortgage plan - who needs it?
If your goal is
principal reduction and saving money, then it is a good plan. If you do
it on your own instead of paying someone else to do it for you, then it
is a great plan.
|
