Is Making Biweekly Mortgage Payments A Good Idea?


By Tim Parker | Investopedia

 

Did you get a brochure in the mail or an email that offered a great way to chop off six to eight years from your home

loan?

 

The way to do this, according to the brochure, is to no longer pay one monthly mortgage payment but instead, pay

every two weeks. The conventional logic is that increasingly the frequency of the payments doesn't allow interest to

build up and over the course of a 30- or 15-year mortgage that can equal years eliminated from your loan.

 

Before you sign up for these biweekly payments, let's see if the accepted logic is actually true and if you're really

saving money.

 

Better Credit?
According to Bankrate, some people believe that making biweeklypayments improves their credit, but this is no

more than a myth according to experts. Using a biweekly payment schedule set up by your mortgage lender puts

you on an automatic withdrawal plan that assures that your payments are made on time. If you're the type of

person who misses payments from time to time because you forgot to write the check, an automatic payment

schedule will improve your credit because of the on time payments, but you can get the same advantage with an

automatic monthly payment too.

 

Reduces Interest?
Sadly, this is another myth not to believe. Depending on the particulars of your loan, there is a good chance that

the company receiving your mortgage payment isn't the company that holds the loan. Although you're paying twice

per month, the servicer receiving your payment isn't making biweekly payments to the company who owns your

loan. They're likely holding it in an account until the end of the month.

 

But does this mean that the interest that is building up isn't reduced? Remember that each calendar year has 52

weeks and if each month has four weeks that would only be 48 weeks. This means that biweekly payments won't

consist of two payments each month but instead, 26 half payments which equals the equivalent of 13 monthly

payments in a year. If the math is a little tough to follow, it works like this: Biweekly payments are equal to 13

monthly payments in a year where making traditional monthly payments are equal to 12 payments each year. By

paying an extra month, you're paying extra principal which shaves six to eight years off the life of the loan over

time.

 

But do you have to make bimonthly payments to do that? You could divide the amount of one month's payment by

12 and add that amount to your monthly mortgage payment. If you're paying $1,500 per month, divide 1,500 by 12

and make your monthly payment $1625. Talk to your mortgage company first to make sure there isn't something

more you have to do to make sure it is applied to the principal amount of your loan.

 

Don't Make it a Contract
There are two problems with answering the call from your lender for biweekly payments. First, the reason they

want to sign you up for this plan is because there will be a fee and that's more revenue for the bank. They are

charging you to give them a two week loan, according to Bankrate. Second, most consumers already have enough

contractual payment obligations in their life. Especially for those without a lot of financial reserves, it is better to

keep some flexibility in your budgeting rather than committing to the biweekly payments. You can always make

extra payments when you get three paychecks in a month, receive a tax refund or come in to unexpected money.

 

The Bottom Line
Don't fall for the advertisement to make biweekly payments through a bank or mortgage servicer sponsored plan.

In this case, the benefits do not outweigh the gains.

Comments:
No comments

Post Your Comment:

The data relating to real estate on this website comes in part from the MLS® Reciprocity program of either the Real Estate Board of Greater Vancouver (REBGV), the Fraser Valley Real Estate Board (FVREB) or the Chilliwack and District Real Estate Board (CADREB). Real estate listings held by participating real estate firms are marked with the MLS® logo and detailed information about the listing includes the name of the listing agent. This representation is based in whole or part on data generated by either the REBGV, the FVREB or the CADREB which assumes no responsibility for its accuracy. The materials contained on this page may not be reproduced without the express written consent of either the REBGV, the FVREB or the CADREB.