Author Topic: Biweekly Mortgage Payments - good idea?  (Read 4149 times)

Pixelshot

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Biweekly Mortgage Payments - good idea?
« on: March 03, 2016, 06:26:07 AM »
My wife and I recently bought our first home on a 15 year mortgage (fixed 3.0 APR). I received a solicitation in the mail from a company claiming to be able to reduce the amount we pay in interest by changing the payments to biweekly rather than monthly, even though the biweekly payments are basically half of the monthly payments. I was intrigued.

Doing a little googling, it seems that this is a thing. We can easily arrange our finances in a way that makes a more frequent payment so I guess I'm wondering what's the down side? (aside from the fact that 26 biweekly payments per year is slightly more than 12 monthly payments) How does this work? Do I need to do it though a third party company or can I simply make more frequent payments and have the same result? Is weekly better than bi-weekly?  (My loan was sold to Freedom Mortgage - I assume that they'd be ok with an accelerated payment setup)

Thanks.

Apocalyptica602

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Re: Biweekly Mortgage Payments - good idea?
« Reply #1 on: March 03, 2016, 06:37:36 AM »
We were weighing this ourselves, also in the mortgage shopping process. The gist I've gotten from it is.

There's an advantage... but the advantage is for the average American who can't possibly squeeze out extra cash at the end of the month, but is barely able to make their mortgage payments.

So 26 bi-weekly payments of 1/2 of your monthly payment results in an entire extra payment over the course of the year. Naturally that's the same as prepaying your mortgage, so you pay less in interest and it shortens your overall mortgage.

In short, there is no reason for a mustachian to do this, ESPECIALLY with a third party company that might make you pay a fee to do it You can just prepay your mortgage normally for free assuming you have no prepayment penalty (a penalty is quite rare nowadays.)

Of course, you're going to have people asking 'why would you want to prepay a fixed 3% mortgage' that topic has been done to death but know that mathematically its better to keep the mortgage and invest the difference.

Pixelshot

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Re: Biweekly Mortgage Payments - good idea?
« Reply #2 on: March 03, 2016, 06:47:59 AM »
Thanks. A bit confused though, since the online calculators show a significant difference in interest amount. I suppose what you're saying is that I can get the same result by simply adding a few dollars to my autopay? Would there be an advantage to paying during the month? (before more interest has accrued)

Luckily, this soon will be my only debt so I want to attack it head on. Even 3% is annoying to me, but I can see the logic in using that cash to invest instead. Guess that's for another thread.

Another Reader

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Re: Biweekly Mortgage Payments - good idea?
« Reply #3 on: March 03, 2016, 06:52:27 AM »
Never, ever give a third party the money to pay your mortgage payments.  If they go out of business or do not pay for some other reason, it's your credit that is ruined and you still have to make the payments. 

Making bi-weekly mortgage payments is the same as making a 13th mortgage payment during the year (26 bi-weekly payments).  Take that 13th payment amount, divide by 12, and add that to each monthly payment.  If your mortgage payment is $1,200, simply add $100 to your monthly payment.  That amount will be applied to principal reduction.  No fee to pay, no third party risk.

k-vette

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Re: Biweekly Mortgage Payments - good idea?
« Reply #4 on: March 03, 2016, 06:53:39 AM »
Most banks or loan companies won't accept biweekly payments any more.  All the 3rd party will do is charge you $500 for their service, then set the money as if to make "extra payments" later.  They cant make payments during the month.  You can pay extra yourself and get the same result.  I've dealt with one of these,  borderline scam to me.

Pixelshot

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Re: Biweekly Mortgage Payments - good idea?
« Reply #5 on: March 03, 2016, 07:14:23 AM »
Yes, my "scam alert" warning bells went off when I first saw this. However, I thought I'd do a little investigating to see if something similar could save me money. I guess the bottom line is adding a bit to my payment as @Another Reader suggests.

Thanks.

Ricksun

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Re: Biweekly Mortgage Payments - good idea?
« Reply #6 on: March 03, 2016, 07:23:23 AM »
Most banks or loan companies won't accept biweekly payments any more.  All the 3rd party will do is charge you $500 for their service, then set the money as if to make "extra payments" later.  They cant make payments during the month.  You can pay extra yourself and get the same result.  I've dealt with one of these,  borderline scam to me.

THIS!!!!

The Third Party will (1) charge you an upfront fee to set up an escrow account, and (2) hold onto the "extra" monies collected and earn interest on it for themselves until the end of the year and make a single double-payment in month 12.

If you want to do this, just add on (1/12) of your monthly payment as Another Reader recommended, or do the same concept of biweekly savings in a separate checking account used only for the mortgage without paying an extra fee and keep the (minimal) interest yourself.

Retire-Canada

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Re: Biweekly Mortgage Payments - good idea?
« Reply #7 on: March 03, 2016, 07:39:55 AM »
My mortgage lender offers bi-weekly payments. The payments are direct deposited from my account to the lender. There are no fees or extra charges. No third party is involved.

FerrumB5

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Re: Biweekly Mortgage Payments - good idea?
« Reply #8 on: March 03, 2016, 07:52:31 AM »
Keep in mind that even if no fees involved, bi-weekly payments result in more money paid by you every month. It makes you less flexible if budget is tight - you cannot skip a payment, while adding 1/12 every month equals bi-weekly payments but it's voluntary and can be dropped every now and then if needed

gardeningandgreen

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Re: Biweekly Mortgage Payments - good idea?
« Reply #9 on: March 03, 2016, 08:04:30 AM »
I currently do the bi-weekly plan because it makes my budgeting for each paycheck easier. I know what from each paycheck is going to investments what is going to mortgage etc. What we do to avoid the fee of a 3rd party(which is a huge rip off by the way) is to have a second account that we label strictly as a mortgage account. We then have it auto pay from that account each month. This is essentially what the 3rd party would be doing. On those months when there is an extra 1/2 payment we just make an additional principal payment.

Pixelshot

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Re: Biweekly Mortgage Payments - good idea?
« Reply #10 on: March 03, 2016, 08:40:13 AM »
very sensible advice. Thanks to all.

frugaliknowit

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Re: Biweekly Mortgage Payments - good idea?
« Reply #11 on: March 03, 2016, 09:45:49 AM »
All I need to do is call my mortgage servicer and say I wish to pre-pay some principal (they call it "curtailment").  This can be done repeatedly (in my case each month), one time, whatever you want.  You can stop it at any time.

No need to engage any fee collecting third party to do this.

teen persuasion

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Re: Biweekly Mortgage Payments - good idea?
« Reply #12 on: March 03, 2016, 11:15:43 AM »
Create an amortization schedule for yourself.  When I did this, I could see how much was paid in interest each month, and how much in principal.  At the very beginning of your mortgage, the principal payments are relatively small.  I would add in at least one extra principal payment, essentially knocking out 2 months.  Towards the end, much more is going to principal, so doubling it is harder.  Thus I focused my prepayment efforts on the beginning.  I could easily add 3 or 4 months worth of principal at a time, or sporadically add larger lump sums to knock out years at a time.  The last year we simply paid as scheduled, but we paid our 30 mortgage off in less than 15 years, despite low income, 5 kids, SAHM and DH unemployed for a year and going to grad school somewhere in the middle.

Pixelshot

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Re: Biweekly Mortgage Payments - good idea?
« Reply #13 on: March 03, 2016, 11:22:24 AM »
Thanks. Once my student loans are knocked out later this month (yeah!!), I'll do this for sure.