Buying a home typically involves finding the right financing to fit within a budget. Typically, the choice is a 30 year term. The main benefit of the 30 year term is that it creates a lower monthly mortgage payment. In contrast, it means the homeowner pays more interest compared to a 15 or 20 year loan. So, when a product like a biweekly mortgage payment program comes along, it peaks an owner’s interest. If someone offers saving tens of thousands in interest plus cut years off the mortgage term, most will at least consider it. In theory, this is a good thing, but there are some key downsides as well as free alternatives to this popular request.
Biweekly Mortgage Payment Basics
First of all, if you’re not a homeowner yet or just became one, here’s a tip. You’re going to get biweekly mortgage payment offers in the mail. Yes, junk mail. These offers will look like they are from your mortgage company, but most of the time they’re not. We will explain the potential benefits of paying off the mortgage quicker than 30 years, but also provide the potential traps of biweekly mortgage plans.
Biweekly Versus Twice Per Month
Except for exotic mortgages, everyone with a mortgage payment is required to make monthly payments. Typically, mortgage payments are due on the first, have a late fee if over 15 days late, and are reported late on credit reports once 30 days late. In a biweekly program, the mortgage payment is first divided in half. Next, it is important to understand the difference in biweekly and twice per month. There is a difference and it can help and hurt you.
Twice per month means 24 periods (12 months x 2). Biweekly means every 2 weeks. There are 52 weeks in a year. So, dividing 52 weeks by 2 equals 26 periods. This is a hint for how biweekly works and it has to do with the extra 2 weeks. Therefore, the takeaway is that doing anything biweekly is more often than twice per month. This includes getting a paycheck or making a mortgage payment.
Biweekly Mortgage Benefit – Paying Off Early
So, you probably caught that if you pay biweekly, you are going to be paying 2 extra half mortgage payments a year. If done correctly by notifying the lender of an extra principal payment, this will shave interest off the mortgage. Thus, shortening the term of the loan and total payback of the mortgage. Although, it is key to remember that you are incurring an extra expense during the year. There will be 2 months each year where a homeowner will make 3 half mortgage payments. For some, that could create serious budget issues.
Paying a low rate mortgage off early has pluses and minuses. Many financial advisors would say get a 30 year mortgage and pay it for the full term. That is, barring any opportunities for low or no cost refinancing that makes sense. Why? Because mortgages are typically low fixed interest rates, sometimes with income tax savings as well. An advisor may often suggest paying off higher interest debt first, followed by investing in retirement, college savings, emergency savings, and more. Yet, then there is the school of thought to pay off the mortgage.
Dave Ramsey has famously taught many to pay off the mortgage ASAP. Get out of debt! I’m sure that he too would first say get rid of other consumer debts first though. Everyone is different. Some want to pay off the mortgage as quickly as possible. Where others see the mortgage as a vehicle to save in other areas. Either way, it is highly suggested to consult a professional to help in this decision.
Biweekly Mortgage Calculator
Now you know the basics behind biweekly. So, here is the typical process if enrolled in a biweekly mortgage plan. This can vary from company to company.
- Draft half of the mortgage payment every two weeks from borrower’s bank account
- Company holds the funds in an account
- Company pays the monthly mortgage payment when due
- After a year, there is an extra full monthly payment in the account
- Company pays the one extra month towards principal on the mortgage
- Mortgage balance is reduced, but total mortgage payment remains the same
- The interest is reduced each month
- Amount towards principal is increased
- Mortgage is on its way to being paid off quicker
- Saves interest, potentially thousands to tens of thousands over the term
BiWeekly Mortgage Warnings
That “saving tens of thousands over the term” sounds pretty good doesn’t it? That is the advertising part or the headlines you will see. Yes, it is true that paying extra on the mortgage will save interest and potentially a lot of interest. But there are some drawbacks to be aware of when you get those solicitations in the mail.
- Potential third-party fees up to $400
- Draft fees every 2 weeks, not twice per month
- Two months have 3 payment drafts
- Payments collected biweekly but paid on mortgage once per month
First thought maybe “Hmmm, pay $400 up-front and a small transaction fee to save tens of thousands?” Sign me up! Not so fast. Beware of what these fees may do. For instance, the Consumer Financial Protection Bureau has filed lawsuits against biweekly companies for excessive fees. Check out this article on $49 million in fees for deceptive mortgage payment program. Furthermore, what if the biweekly company doesn’t make the mortgage payment on time? When you are not in control of your payment, there is the trust factor to consider. Protect your credit at all costs.
Luckily, there is a free option. Yes, free and you can be in control of it.
Biweekly Mortgage Free Alternative
The above fees may not sound like much but it is a charge and adds up. Plus, having 3 half payments come out in two months out of each year could cause budget issues. It may not work well with a homeowner’s once or twice per month paycheck. Especially, if the homeowner doesn’t have cash reserves.
How about this? Instead of paying out this money and getting on a required schedule, do it yourself, but don’t you need a company to handle this for you? Nope! All you have to do is save up one extra principal and interest payment per year. Then, send it to the mortgage company as an extra principal payment. Boom! Same result for FREE. Here’s an even better option if it fits the budget. Divide the monthly payment by 12 and send 1/12 as an extra principal payment every month. This will work out a little better than the once per year.
Maybe there are times where money is tight. No problem, you are in control. Focus on other areas and come back to paying extra when ready.
Should no one choose a biweekly program? No. For instance, there are some mortgage servicers that offer this program for free. If that is the case and it fits your goals plus budget, then have at it. Also, if the goal is to pay off the mortgage quickly but a homeowner doesn’t feel the discipline is there to do it. Then, consider the fees a cost of being disciplined to make you pay off the mortgage early.
More Tips to Pay Off the Mortgage Quicker
- Apply tax refund towards principal
- Use pay raises to pay extra towards principal
- Pay off other high-interest debts
- Take monthly savings from paying off debts & apply towards principal
- Get a secondary source of income
- Change in lifestyle
- Beware of scams!
Hopefully, this has provided great insight into how a biweekly mortgage program works. If considering buying a house and looking to save as much as possible, contact an OVM Financial loan officer. A thorough discussion of goals, scenario, and options could put you on the right path towards an affordable home ownership.