Biweekly Mortgage Payment Plans: Ripoff Or Smart?

If you’re a homeowner with a mortgage, you’ve probably seen promotions for biweekly mortgage payments come from your lender or a third-party company. Promos usually lead with something like “How would you like an extra $59,314 in your bank account?” or “Pay off your 30yr mortgage five years early!”

Let’s look past the promos to see if biweekly mortgage payment programs are smart or a ripoff.

A biweekly mortgage payment plan simply means you’re making half your mortgage payment every other week. It’s sold to you as a way to pay off your mortgage early using your same budget.

But your monthly budget is expanded slightly because paying half your mortgage every other week means you’re making 26 payments. This is the equivalent of 13 mortgage payments per year instead of 12.

It’s true you may not feel that budget difference since you’re just chopping your mortgage payment in two and paying each portion every other week. It’s also true that you’ll end up paying your loan off five to six years early and saving tens or hundreds of thousands.

For example, if you have a 30yr fixed loan of $408,500 at 4.5% and a payment of $2069.81, a biweekly plan would save you $59,314 and you’ll pay your loan off in 25 years.

Or if you have a 30yr fixed loan of $1,050,000 at 5.375% and a payment of $5879.70, a biweekly plan would save you $215,204 and you’ll pay your loan off in 24 years.

HERE’S THE CATCH: institutions charge $350 to $500 set up fee plus $1.50 to $3.00 for each biweekly payment processed.

Relative to the savings, you could argue these fees are worth it. But here’s how to accomplish the same goal with zero fees: the exact mathematical equivalent of a biweekly payment program is making a thirteenth payment per year.

In the $408,500 loan example above, your principal+interest payment is $2069.81 twelve times per year. If you pay this amount a thirteenth time each year, the entire $2069.81 is applied to paying down principal, and you’ll pay off your loan five years early.

It doesn’t matter if you pay $2069.81 in extra principal month-to-month or do it once per year, the end result is the same. Again, it’s the mathematical equivalent of the biweekly program.

Your monthly mortgage statements have an option enter an ‘Additional Principal’ payment each month.

So if you paid the entire thirteenth payment once per year in December, your December payment would be for $4139.62 (twice your normal mortgage payment), and you’d enter $2069.81 in the ‘Additional Principal’ category.

If you want to space that thirteenth payment over the year, you divide your $2069.81 payment by 12, and enter the resulting $172.48 in the ‘Additional Principal’ category each month.

Whether making additional principal payments monthly or all at once, you just need to make sure your lender applies it correctly when you review your next statement.

Using this method, you’ll accomplish the savings goal of a biweekly payment plan without the fees.

 
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