The Biweekly Mortgage - Who Needs It?

The Biweekly Mortgage - Who Needs It?

  • Luci Edwards
  • 05/25/22

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 pop up regularly.

The ads promote a Biweekly 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 excellent savings, you must 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 want to charge you money for something you can do on your own for free.

The Basics:

Usually, you make twelve mortgage payments a year. Since there are fifty-two weeks in a year, a biweekly mortgage equals 26 half-payments a year. The equivalent would be making thirteen mortgage payments a year instead of twelve. By applying for 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 genuine.

How it Works:

You cannot simply mail in half a payment to your mortgage lender every two weeks. Since they do not accept partial payments for legal and accounting reasons, the mortgage company would mail your half-payment back to you.

Instead, the biweekly mortgage company is an intermediary between you and your mortgage lender. They automatically debit your checking account for half of your mortgage payment every two weeks, then place your funds into a trust account. 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. Your funds are withdrawn from the trust account and forwarded to your mortgage lender when your mortgage payment is due.

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 additional 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

There are potential dangers because your funds are held in the trust account until your mortgage payment is due. Not only are your funds held in this account, but so are the funds of everyone else enrolled in the biweekly program. That is a lot of money.

Most likely, there will be no problems.

However, if 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 biweekly payment company, you may find yourself digging into your savings to make the amount directly -- even though the biweekly payment company has already collected your funds.

Later you can work out the trust account problem with your biweekly payment company.

The Cost of the Biweekly Mortgage

Usually, a set-up fee 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 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 Biweekly Mortgage

Your mortgage will amortize more quickly by making principal reductions using the biweekly mortgage program, saving you money. How quickly your loan pays off depends on your interest rate and when you begin making the biweekly payments.

On a $100,000 loan at an 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 any amounts you paid in set-up, transaction, and maintenance fees from those savings.

No-Cost Alternatives to the Biweekly Mortgage

Instead of hiring a company to manage your biweekly 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. 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. The loan would be paid off three months quicker than with the biweekly mortgage. You save more because you are making a principal reduction each month instead of waiting for funds to accumulate to make one principal reduction a year.

Self-Discipline?

The biweekly 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 biweekly mortgage enforces discipline upon you, and by doing so, they save you money.

However, banking online and automatic deductions are readily available in this technologically advanced age. You can set up your automatic deductions, including the additional principal reduction, and have it go directly to your mortgage lender. Since the deduction occurs automatically, just like with biweekly mortgages, self-discipline is not a problem. Once again, you don’t have to pay anyone to do it for you and save even more money.

Conclusion

The biweekly mortgage plans do not 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. If you can do the same thing for free, plus save yourself even more money by doing it on your own, why pay someone else?

The biweekly mortgage plan - who needs it?

If your goal is principal reduction and saving money, it is a good plan. It is an excellent plan if you do it independently instead of paying someone else to do it for you.

Work With Us

We pride ourselves in providing personalized solutions that bring our clients closer to their dream properties and enhance their long-term wealth.

Follow Us on Instagram