Bi-Weekly Mortgages

Whether you already have a fixed-rate mortgage or are thinking about getting one, please read on.

I want to alert you to the bi-weekly mortgage scam and at the same time teach you how you can do what the scammers do but more effectively and for free. It’s a way to save thousands if not tens of thousands of dollars over the life of your loan with very little effort.

If you recently bought a house or re-financed a fixed-rate mortgage, it is more than likely you’ve been solicited by at least one bi-weekly mortgage originator. They claim you can save money and reduce your loan term by signing up for their program. So, what’s a bi-weekly mortgage all about?

How Bi-Weekly Mortgages Work

First, what does bi-weekly even mean? I know bi-monthly means you pay twice a month. So bi-weekly must mean you pay your mortgage twice a week? In mortgage parlance, it means you pay your mortgage every two weeks. Go figure.

Specifically, one-half of your regular monthly mortgage payment is made to your bi-weekly mortgage originator every two weeks. By the end of the year, twenty-six payments have been collected, which is the equivalent of thirteen months of payments.

Those extra two payments are then used to make an unscheduled principal balance reduction of your mortgage, one above and beyond the loan’s amortization schedule. Interest calculations are now done on a lower principal balance, resulting in less interest being charged. Because the regular payment of most fixed-rate loans is fixed and can’t change, your future payments further reduce the amount of interest owed, resulting in tremendous savings and a shorter loan term.

So, a bi-weekly mortgage does save you money. Unfortunately, as with other financial-related products, there’s quite a bit of deception going on here. Don’t fall for it.

The Bi-Weekly Mortgage Scam

People in the mortgage industry argue that a bi-weekly mortgage is not a scam. I’ll let you be the judge. I’ve already established that a bi-weekly mortgage will save you money and potentially cut years off the time it takes to pay off your fixed-rate mortgage.

That’s true as advertised, but I’ve found most people who sign up for a bi-weekly mortgage don’t realize how little these originators do for you. You can lose the fees and accomplish more with less money by doing it yourself. You’ll be surprised how little effort it takes on your part.

The deception lies in the fact that whoever sold you on that bi-weekly mortgage makes you think they’re doing way more than they really are. The fact is, halfway through the month when the bi-weekly mortgage people receive your payment, they deposit it into an interest-bearing account (interest for them, not you). They do the same when your next payment arrives in two weeks, then make your regular monthly payment to the lender on the due date.

Your bi-weekly loan originator all the while is raking in interest from their account and fees from you. The worst charge you for every transfer made, as well as their initial “set up” fee. They do this month after month, until the end of the year. That’s when they actually do some good and make a principal reduction on your loan balance with those extra two payments.

All the while, they know you’re probably confused as hell and won’t figure out you can do what they do easily and much more economically.

Standardized Mortgage Payments

A much wiser alternative to a bi-weekly mortgage is “standardizing” your monthly mortgage payments. There are zero fees, it’s super-easy to set up, and you save even more on interest.

Instead of waiting till the end of the year to make a principal reduction like the bi-weekly folks, start your principal reductions with this coming January’s payment. Divide your monthly mortgage payment by 12. Add the result to each month’s payment.

Be sure and stipulate to your lender that the extra amount above and beyond your regular payment is for principal reduction; Otherwise, they may hold it as a credit to your account instead of reducing your principal.

Your 12 individual principal reductions next year will be done sooner and throughout the year one-twelfth at a time as compared to a bi-weekly mortgage when it’s all done at the end of the year. Standardizing your mortgage payments saves you even more on interest and will reduce your payment period even faster!

Plan now to allot for that extra outlay in next year’s budget. It can be hard to come up with that extra money each month, but not if you plan for it now. Remember, even a little financial planning goes a long way.

Lump Sum Principal Reductions

Maybe you’re on the richer side, or you got a big year-end bonus or tax refund. Assuming paying off your mortgage is your number one financial goal, pay your principal down all at once by adding the entire extra month’s payment to your January payment.

Again, make sure you stipulate to your lender that the extra payment is for a principal reduction. Because you’re reducing your principal balance all at once in January, this strategy is superior to them all: You’ll save even more money and reduce your loan term even faster than the previous methods described.

Pre-Payment Penalties

One last thing to check. Make sure your fixed-rate mortgage doesn’t have a pre-payment penalty. This clause penalizes you when reducing the principal balance on your mortgage faster than the loan’s amortization schedule. If a pre-payment penalty exists, the strategies discussed here, or even the bi-weekly mortgage scam for that matter, won’t work.

The good news is, that thanks to legislation passed by Congress to help protect homeowners, most loans don’t have them. If your loan is federally backed (most are) any pre-payment penalty can’t last for more than three years.

Is It a Scam?

I know this is confusing. That’s exactly how these bi-weekly loan originators pull off their little trick. They’re counting on you to stay confused. Hopefully, now you know better: Do it yourself more effectively and with no fees.