Paying Your Mortgage Biweekly
One of my friends recently purchased a home and she was sent a letter (if you recently purchased a home, you’ll probably be familiar with how many letters you will get informing you of great refinancing rates) about a program that would speed up her mortgage payments by sending them in every two weeks instead of just at the end of the month. She was primarily wondering whether it was a scam and whether it “worked” because I suppose the letter, which always looks shady, probably did a poor job of explaining why it would pay off her mortgage faster.
The biweekly mortgage payment strategy is one that’s been in existence for quite some time. It is legitimate and there are two reasons why it’s legitimate:
- More Payments - Let’s say your mortgage is $1000 a month. When you make one payment a month, you pay a total of $12,000 each year towards your mortgage. When you make two payments a month, you’re now talking about twenty six (26) payments (fifty two weeks divided by two) of $500 which is equal to $13,000 a year - or $1,000 extra. Clearly, if your budget can handle it, this will pay your mortgage off faster simply because you’re paying more.
- Less Interest - When you pay the standard once a month, interest accrues on your balance for that entire month. When you pay twice a week, a greater percentage of your payment is applied towards the balance and you speed up where you are on your amortization schedule. The principal, in theory, has less time to accrue interest.
So, now that you’re convinced this is a legitimate way to speed up the rate at which you’re paying down your mortgage, let me give you the advice I gave my friend if you’re thinking about getting one of these “services.” Don’t. You don’t need to pay some fancy expensive company for this service, you can usually talk to your lender and they can set something up for you. If they are unwilling and you have no prepayment penalties, just send in the payments yourself. With online banking, it’s easy to schedule regular payments automatically so you won’t even have to buy any more stamps.
So… does anyone know why companies were sending me letters asking me to refinance a month after I just got a mortgage? And why would they ever think I’d accept their offer?
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18 Comments - Share Your Thoughts
I’ve found that if you have X, and company Y can make money off of doing Z with your X, then they will come after you do let them do Z with your X as soon as humanly possible.
Example 1: I now own a roof. It’s not very old. But every company in the world thinks I need it replaced just because I have it.
Example 2: I just got my tires rotated by company Y. So they sent me a coupon for money off a tire rotation. Swell.
Our bank sent us a letter like this earlier in the year about setting up bi-weekly payments. They wanted $350 just to set the service up! I told them to go fly a kite. But like you said, with online banking it is easy to just move money onto the mortgage bi-weekly or whenever is convenient for you.
My mortgage is with Countrywide and I have an ARM. However, when I tried to use their service to pay my mortgage biweekly instead of monthly, I was told that this option is not available for ARM. I am not sure if this is a general rule of Countrywide specific. Paying the bill every two weeks can definitely save some interests, but if you already pay additional principles on top of what you have to pay, then it’s not that helpful, in my opinion.
I have not seen or recieved any offers by a third party company. But my current mortgage company sends me offers about this. They charge $15 a payment to set it up, which is completely insane. I recently started adding the extra payment amount into my normal monthly payment toward principal, which works out the same too.
Let’s also not forget that the interest savings using this method are pretty miniscule during the first decade or so of a fixed mortgage. If your cash flow can handle the extra payment a year, why not add it to savings instead?
I got one of these letters recently as well. I don’t remember all the offer details, or even if it was from my mortgage company or a 3rd party, but after seeing the fees (”low” annual fee of hundreds of $ plus a startup fee) I tossed it.
I _have_ been meaning to switch from a monthly to semi-monthly payment schedule to match my direct deposits, but I keep forgetting to do it.
I’m in 100% agreement that these biweekly “deals” are a ripoff, if I wanted to pay more towards my mortgage or pay it more frequently I would just do it, I shouldn’t have to (and I think in most cases don’t have to) pay extra for setup or payment. It’s easy to understand why they do it though, it costs them little or nothing to process the additional payments and therefore whatever extra money they can get you to pay for these extra “services” is pure profit. Many people would never think of doing this on their own, so by packaging it up as a “service” and charging for it, they can make it sound like a great deal even though they’re charging you for something that in essence you can already do for free.
The exceptions here might be mortgages that have policies where they would simply hold your payment until the due date and then apply it, even though you sent it in early. That’s kind of a shady practice in my opinion, but if your mortgage works that way, then taking their deal might be the only way to get a biweekly program to work. In that situation, a better alternative is probably to just add a bit to your normal payment, it will have the same general effect and should work with any mortgage that doesn’t have prepayment penalties (and even some that do), and you won’t have to pay any additional fees.
Regarding the refinancing offers, I think it’s simple direct marketing principles in action. I read somewhere that even though it’s counterintuitive, the most effective time to send a direct marketing letter to someone is right after they bought a similar product/service. Logically you would think that if you just bought vitamins, you would be less likely to buy more than someone who hadn’t just made that purchase, but if you actually test that idea the opposite is true. The same principle is probably being applied to your refinance.
Another factor in mortgage refi is simply how they generate their leads. When you get a new mortgage or refinance, it’s public record. Mortgage lenders who do direct marketing get their leads from this information, that’s why they are able to personalize their letters with your current lender and/or loan amount. So when they pull the next batch of new loans, they add you to their mailing list, and you start getting letters.
It is amazing how many years that can be wiped off the payment of a mortgage by paying bi0weekly.
[...] I was reading this post on Blueprint for Financial Prosperity and it brought up several thoughts which I’d like to share. [...]
As you can see in the trackback below (which updated incredibly fast), I read your article and started to write a comment, but it ended up turning into a blog post.
Please check it out:
http://www.landlordshmandlord.com/2006/12/01/how-beneficial-is-it-to-make-extra-mortgage-payments-each-year/
BTW, I really like the site = )
They asked you to refinance again because they figured you had so much fun doing it the first time!
Unfortunately, just sending in an extra payment each month may not work. Sometimes mortgage companies will send the check back to you (or misapply it), claiming they don’t know what to do with it. This sucks, but apparently just the way banks behave.
I agree it is a ripoff to have to pay $350 for these services that automate extra payments, however once you’ve paid that fee, it is a very convenient way to shave 7 years off a 30-year. Fortunately, you can also simulate the same effect by making one extra mortgage payment each year. Just make sure you contact your mortgage company to ensure that they apply it properly.
Please don’t pay for this service! If you are going to do it do it yourself. Do make sure they pay principle with it and not either future interest payments or escrow.
Here are a couple of considerations:
1. Before you pay extra have six months worth of mortgage payments saved up. If you run out of income it does not matter how many extra payments you have made in the past they will still want your next payment as soon as it’s due… they don’t carry them forward like they do with some car loans.
2. The earlier you start paying extra the more it helps you… thats because you are paying off more of your principle and so you have less outstanding that you owe interest on. Later on in your loan you owe less so would save less.
3. IF YOU ITEMIZE- you need to consider the tax savings and savings return in your decision… if your mortgage is at 6.5% and you can get 5% in a CD then you may not want to pay towards the mortgage early… that cash can be used for opportunities or emergencies that arise later without costing you any money.
Weekly Roundup - 12/01/06
Here’s a quick look at some of the articles that caught my eye over the past week…
JLP has a list of tax-related records that you should plan on holding onto.
MBH talks a bit about taking the risk out of your year-end FSA activities.
Jim provides s…
[...] Blueprint for Financial Prosperity has a fresh look on biweekly mortgage acceleration. [...]
Well, I have not recieved any offers by a third party company. But my current mortgage company sends me offers about this. They charge $25 as a set up fee which i think is completely insane. Can you help me out ?
Well, bills.com warned me about some of the ‘Deadly Mortgage Mistakes‘ and therefore, i am a bit extra careful while shopping for a mortgage now.
Paying off your mortgage faster, saving thousands of $$$$ is great….
There is more to consider:
1) Banks have options-They can apply an extra payment to any part of
the loan. By Law “Under the borrowsers right to Pre-Pay” any time you
submit in an extra payment, in writing you are to inform the bank where
to apply the extra money. If you do not you are a sitting DUCK!!!!!
Question to ask yourself did they apply my money correctly; and how
much interest did I really save with that transaction??????
2) Who will do an audit for you? Remember you do not get any notice
of how much interest you save, or if the bank apply your money
the right way….
3) Educate yourself fully before you go any direction, trust me what you do
not know will cost you in INTEREST!!!!!!!!!!
many have posted messages stating they haven’t heard from a 3rd party, just their lender. I was looking into bi-weekly payments and called the number on my gmac statement, and the guy asked who my loan was through….turns out the number I called was an agency contracted by gmac and many other lenders….after hearing about the one time $49 sign up fee and the $9 a month processing fee, I then called gmac directly and asked to speak to someone in reference to setting up a bi-weekly payment plan, I was then transferred to the same agency…. this is just info. for any of you who think you may be setting up a bi weekly plan with your lender, you’re probably not, like I said, the first number I called was actually on my gmac statement regarding payment options…