Bi-Weekly Mortgage question

[aceyou]

Hey everyone,

I refinanced my mortgage in the spring and now have decided that I'd like to do bi-weekly payments.  Quick internet searches have suggested that sometimes lending institutions don't really do this in a way that's in your best interests.  I know nothing on the subject, so if you have experience, here's a few questions:

1.  What exactly should I be telling my lender that I want to do?
2.  What questions should I be asking them to make sure it will go well?
3.  What should I do to verify that everything has been doing correctly? 

Thanks! 

[nereo]

To start I'll ask why you want to do bi-weekly payments in the first place.  There's no 'magic' with bi-weekly payments - the differences in cost are because you make 26 payments instead of 12 (i.e. there are two more payments than simply doubling the number of monthly payments). 
A different strategy is to keep monthly payments, but simply overpay every month if you want to pay down your mortgage faster.

That said, if you want to do bi-weekly payments:
1) tell your lender you want to set up bi-weekly payments under your current mortgage agreement (i.e. you will keep your current term and rate).
2) make sure there are no additional fees for changing your payment schedule.  If there are, ask them to waive those fees.  If they won't, don't do it.
3) verify simply by making sure your first two payments go through correctly.  Almost every bank allows you to view payments online.  If anything doesn't go through or if it ever says your mortgage is past due, call the bank ASAP.

cheers
N

[StacheInAFlash]

Quick internet searches have suggested that sometimes lending institutions don't really do this in a way that's in your best interests. 
 

Yeah, many banks will basically hold your half payment until the 2nd half come in two weeks later and then apply both halves at the same time, no different then if you were making a regular payment. Also, you typically can't just make half payments online; rather, any half payment would get treated as a principal only (extra) payment, and you'd still be due to make a full payment by your due date. I've known less mustachian people who have made that "mistake" and then panicked because they didn't have the money to make both the regular payment and half payment in a single month.

I recently refi'd myself, and since it becomes public record I've now been inundated by junk mail flyers from random "finance" companies promising to set me up with bi-weekly payments....it goes without saying, but don't set up your mortgage payments through some random company promising to set up bi-weekly payments for you.

[Hotstreak]

To start I'll ask why you want to do bi-weekly payments in the first place.  There's no 'magic' with bi-weekly payments - the differences in cost are because you make 26 payments instead of 12 (i.e. there are two more payments than simply doubling the number of monthly payments). 
A different strategy is to keep monthly payments, but simply overpay every month if you want to pay down your mortgage faster.

+1


I used to do mortgages.  The only ones who ever took bi-weekly were people that got paid bi-weekly (and were fairly certain they would be for a long time).  Everyone else just makes extra payments monthly or annually, to the same effect.  Why give up control and lock yourself in to a full extra payment per year?

[Dicey]

To start I'll ask why you want to do bi-weekly payments in the first place.  There's no 'magic' with bi-weekly payments - the differences in cost are because you make 26 payments instead of 12 (i.e. there are two more payments than simply doubling the number of monthly payments). 
A different strategy is to keep monthly payments, but simply overpay every month if you want to pay down your mortgage faster.

+1

I used to do mortgages.  The only ones who ever took bi-weekly were people that got paid bi-weekly (and were fairly certain they would be for a long time).  Everyone else just makes extra payments monthly or annually, to the same effect.  Why give up control and lock yourself in to a full extra payment per year?

What ^^these smart guys^^ said.

[aceyou]

Thanks everyone for good advice.  My reasons for wanting to set up bi-weekly payments:

1.  My wife and I have WAY too much of our net worth tied up in cash in checkings/savings account right now anyway.  We are looking for ways to gradually divert this money.  One thing we have done is have all our paychecks go towards 403B and the purchasing of years of service (we are teachers).  However, our savings/checking account is still not going down hardly at all due to low spending and side hustles. 

2.  My wife and I are both teachers with 8 or 9 years under our belts, so our paychecks are very stable and predictable. 

3.  My wife has asked me to do this.  She has been terrifically supportive of me since I found MMM and have gone on the frugality/let's get FI kick a half year ago.  So, if she is asking me to do bi-weekly payments to speed things up, I'd like to get on it because she's being so amazing.  For example, when she knew I wanted to cut expenses, without me asking, she stopped going out for coffee a few times/week, basically cut restaurants out completely, makes meals from scratch she used to buy prepackaged, hardly every buys clothes, etc.  I like that she's getting involved in the investing part of the equation by thinking about our mortgage, and so I want to help make sure this goes awesome. 

[Le Poisson]

We do bi-weekly. Its nice to see that extra payment each year. We also overpay to try and kill the beast a little faster - I know some folks here would say that is a bad idea, but its what we do.

If you are of the paydown mindset, the extra payment each year has an added value in that whatever extra you set up on your monthly payments is also tacked on to that extra payment. If you are doubling down, that means you are actually getting two extra payments in on that one - which is sortof a big deal.

Now everyone can chime in about how investing at 8% is better than killing debt at 3%.

[Gumbo1978]

Correct me if I'm wrong, but I believe if you make an extra payment you have to mark the check "principle only" to avoid making a generalized extra payment.  I'd let your mortgage company know your intentions (again making sure there is no penalty for doing it) and if you want to make the payment principle only, let them know (and document it on the payment). 

I could be wrong here, but it was advice I was given.  In my situation, once I refinanced to 3.625% on a 30 year, I have not accelerated anything.  I like my chances of earning more in the markets.

[nereo]

Thanks everyone for good advice.  My reasons for wanting to set up bi-weekly payments:

1.  My wife and I have WAY too much of our net worth tied up in cash in checkings/savings account right now anyway.  We are looking for ways to gradually divert this money.  One thing we have done is have all our paychecks go towards 403B and the purchasing of years of service (we are teachers).  However, our savings/checking account is still not going down hardly at all due to low spending and side hustles. 

2.  My wife and I are both teachers with 8 or 9 years under our belts, so our paychecks are very stable and predictable. 

3.  My wife has asked me to do this.  She has been terrifically supportive of me since I found MMM and have gone on the frugality/let's get FI kick a half year ago.  So, if she is asking me to do bi-weekly payments to speed things up, I'd like to get on it because she's being so amazing.  For example, when she knew I wanted to cut expenses, without me asking, she stopped going out for coffee a few times/week, basically cut restaurants out completely, makes meals from scratch she used to buy prepackaged, hardly every buys clothes, etc.  I like that she's getting involved in the investing part of the equation by thinking about our mortgage, and so I want to help make sure this goes awesome.

Sounds like you are doing a really good job, and it's fantastic that you have a wife who is so openly supportive of your efforts.  Having both people on board is the single biggest thing.
Getting back to the mortgage - changing it to bi-weekly shouldn't be harder than going into the branch and asking for it, but just make sure they don't charge you extra fees.
I still think the simplest solution for you is to change nothing, but just increase your monthly payments by $X/month.  That will be the least work, maintain your flexibility and have the effect of paying off your mortgage sooner.  Most of the time I see bi-weekly payments set up to last the same term of the mortgage (it doesn't shorten it) - the 'selling point' is that each payment is slightly less than half of what your monthly payment is, but that's due to making 26 payments instead of 24.

Now everyone can chime in about how investing at 8% is better than killing debt at 3%.

Yeah - there's an ongoing and raging debate on this forum about whether you should ever pay down a <4% mortgage faster than you have to.  I personally would not and invest the difference, especially if you have more room in your tax-deferred accounts.  But that's a completely different debate. 
If you ARE finding excess cash in your checking account each month, make sure you are making out your IRAs and 403(b)s before worrying about extra payments

To read up on an 11 page debate here: http://forum.mrmoneymustache.com/investor-alley/paying-off-mortgage-early-how-bad-is-it-for-your-fi-date/

[Le Poisson]

I agree Nereo - however we have managed to accellerate our mortgage by about 5 years in 4 years of payments, so that's good news. And it keeps Momma happy, which is also good news.

A happy wife is a better investment than a divorce lawyer, even if the money could earn more in other places. Luckily for OP, the happy wife part is already playing out.

[aceyou]

If you ARE finding excess cash in your checking account each month, make sure you are making out your IRAs and 403(b)s before worrying about extra payments

We are already maxing out our IRA's and doing what we can with the 403 B's.  My wife and I are using most of our pre-tax income this year to purchase 5 years of service so that we can retire 5 years earlier, so there's not much left in our paychecks that can go into the 403B.  But yeah, basically all of our paychecks are going towards pretax stuff, and I think that's what you are basically implying. 

[aceyou]

I should also add that I would for emotional reasons be happier paying down the mortgage faster, even it if meant losing out on stock market gains.  There's something about a paid off house and not owing a dime to anyone that appeals to me, even if it's not rational to make decisions that way. 

[charis]

Thanks everyone for good advice.  My reasons for wanting to set up bi-weekly payments:

1.  My wife and I have WAY too much of our net worth tied up in cash in checkings/savings account right now anyway.  We are looking for ways to gradually divert this money.  One thing we have done is have all our paychecks go towards 403B and the purchasing of years of service (we are teachers).  However, our savings/checking account is still not going down hardly at all due to low spending and side hustles.

I am confused.  Why wouldn't you just make extra principle only payments with your monthly payment.  I would want to control my mortgage over payments, not hand that control over to the bank.  I get the desire to feel like you are paying it more quickly, but you can accomplish that yourself.  Also, as someone mentioned, it's very common for banks to hold the half payment until the entire monthly amount is in. 

You CAN pay the mortgage down faster if you want, but you don't have to go to biweekly payments. 

[ShoulderThingThatGoesUp]

Just make bigger payments, as long as you don't have a prepayment penalty. There's no good reason to increase your required monthly payment.

[nereo]

If you ARE finding excess cash in your checking account each month, make sure you are making out your IRAs and 403(b)s before worrying about extra payments

We are already maxing out our IRA's and doing what we can with the 403 B's.  My wife and I are using most of our pre-tax income this year to purchase 5 years of service so that we can retire 5 years earlier, so there's not much left in our paychecks that can go into the 403B.  But yeah, basically all of our paychecks are going towards pretax stuff, and I think that's what you are basically implying.

Yes, that was what I was implying, based on your earlier statement that you had too much money in your checking/savings accounts:

(My wife and I have WAY too much of our net worth tied up in cash in checkings/savings account right now anyway.  We are looking for ways to gradually divert this money.  One thing we have done is have all our paychecks go towards 403B and the purchasing of years of service (we are teachers).  However, our savings/checking account is still not going down hardly at all due to low spending and side hustles.)

As I and many have said, the simplest solution would be to just increase your monthly payments and not bother with trying to switch to bi-weekly payments.  Same result, less bother, and the 'fall-back' option of reverting to minimum payments should a large emergency arise.
That said, do what you like.  THere's no 'wrong' answer - both will get you to your goals.

[aceyou]

Well, I called my mortgage company today, and they said that because my loan was sold to Freddie Mac, I am not able to do bi-weekly payments.  Weird, but ok. 

So, I'm going to go the route of sending in extra checks to knock down principal, as several of you have suggested, it looks like that option wins by default (and from what many of you are saying it may have be the best option anyway). 

Also, an added bonus to this is that I am looking to do some serious credit card churning in the coming year.  I signed up for a CC churning online course that starts July 1 by Miles Dividend MD.  I'm thinking that whenever I need to manufacture some extra spending, I might just use his tactics to use extra mortgage payments as a way of meeting my spending requirements.  Cheap travel, less mortgage interest, and a quicker payoff on my mortgage all in one!!!

Thanks everyone for your suggestions. 

[Dicey]

I should also add that I would for emotional reasons be happier paying down the mortgage faster, even it if meant losing out on stock market gains.  There's something about a paid off house and not owing a dime to anyone that appeals to me, even if it's not rational to make decisions that way.

Yeah, not so much as you might think. You will always owe utilities of some sort and taxes. Always taxes. We paid cash for ours and it still kills both of us not to have a mortgage when rates are so low. We have over 1M in our stache, not including the house, so it's definitely a FWP. In all cases, I wouldn't prepay one red cent unless and until all available retirement account options are stuffed to the max.

[Cycling Stache]

I should also add that I would for emotional reasons be happier paying down the mortgage faster, even it if meant losing out on stock market gains.  There's something about a paid off house and not owing a dime to anyone that appeals to me, even if it's not rational to make decisions that way.

Yeah, not so much as you might think. You will always owe utilities of some sort and taxes. Always taxes. We paid cash for ours and it still kills both of us not to have a mortgage when rates are so low. We have over 1M in our stache, not including the house, so it's definitely a FWP. In all cases, I wouldn't prepay one red cent unless and until all available retirement account options are stuffed to the max.

This is why it's a personal decision.  We did pay off our house at a low interest rate.  Of course we still have to pay taxes and insurance, but coming up with $10,000 per year rather than $45,000 per year is a completely different issue.  I liked the idea of knowing that if things fall apart, we'd have a place to live, no debts, and we could eat cheaply if we had to.  That gives me the security to fully invest in the stock market knowing that I don't really need that money, and it turns a risk averse person into a risk neutral one.

Behavioral economics does matter.   If paying down the house makes you feel better, do it, especially if you're also investing in the market through your retirement accounts along the way.  (Do make sure you're investing in the market along the way!)  Just be aware that the truly economically rational way to handle a low-interest mortgage over a long time period is to invest in the market at estimated 7% growth (with volatility, but less volatile over a long time horizon), rather than accelerate the mortgage payments.

Don't feel bad about no bi-weekly mortgage plan.  All the advertisements I saw for them included recurring fees for giving you that option--it was basically a marketing ploy to increase revenue.  The default seems to be that sending in a partial payment gives you no credit until a complete payment is received.  So just send in however much extra you want with your regular payment, and you're good.  Or if your bank makes it easy to do, send in additional payments designated principal-only just for fun at random times.  Yes I just said that--it's a Mustachian forum. 

Finally, if you haven't already, consider getting a home equity line of credit (HELOC) to use as a substitute for large cash reserves.  See the MMM article on "Springy Debt."  That's what actually got me going down the path of Mustachianism, and it really made sense to have a HELOC that you can tap at any point at a very low interest rate, which works pretty much the same as cash reserves in case of emergency.  The only downside is seeing the confused look on the banker's face when you explain that you don't need the HELOC for anything at all--just in case of emergency!

Good luck, and hooray for the supportive wife!