Managing Money
The Biweekly Mortgage Rip-Off By Mark A. Keen, CFP®
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y wife and I recently purchased a new home for our growing family. Shortly after we closed on our loan, we began receiving solicitations for a variety of services and products – some beneficial and some not so much. Several of these offers were for what, in my opinion, is one of the biggest rip-offs going – the biweekly mortgage payment plan. If you’ve recently refinanced or bought a home yourself, you’ve undoubtedly received these biweekly plan offers as well. While I simply usher the offers into the shredder without much consideration, I have received several calls from clients asking what they’re all about. And because so many people are taking advantage of the record low mortgage rates and refinancing, I thought it would be a good idea to write an article and explain why the biweekly payment plan is a waste of money. Although the companies offering the biweekly plan change, the pitch remains the same: “Sign up for our biweekly payment plan, and you’ll build equity faster, save thousands of dollars in interest expense and pay off your loan quicker.” I’m not making this up. A real and actual offer received by one of my clients explicitly stated that he would effectively reduce his current mortgage interest rate from 3.875 percent to 3.36 percent, save approximately $22,556.18 of his mortgage interest obligation and pay off his home approximately 3.9 years early. And he could receive all of these benefits for simply agreeing to allow this company to deduct one-half his regular monthly principal and interest payment from his
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bank account every two weeks. Oh, and by paying an up-front fee of $295, plus an additional $1.50 every time the company debits his bank account. While most of the benefits proclaimed in this biweekly payment plan offer can be true, it’s not the biweekly payment plan itself that makes them so. For example, your credit score won’t increase just because some company is
principal and interest payment is $1,025.39, so the biweekly payment would be $512.70. Under the terms of his traditional mortgage, he would make 12 monthly payments of $1,025.39, for a total of $12,304.68 each year. With the biweekly payment plan, he would make 26 $512.70 payments, for a total of $13,330.20 each year. Now here’s the kicker: Biweekly
THERE’S NO reason to pay for a biweekly mortgage payment service because you can get the same benefits by making an extra principal and interest payment each year. debiting your bank account every two weeks. Your credit score may increase, but it is because you’re paying your mortgage on time each and every month. What a brilliant concept. Similarly, while you can reduce your interest cost and life of the mortgage, it’s not biweekly bank account deductions working the magic. Rather, it’s the fact that you’re making additional payments on your mortgage – specifically, one extra principal and interest payment each year. Let me explain. A biweekly payment plan simply divides your normal monthly principal and interest payment by two and then requires that payment be made once every two weeks. Because there are 52 weeks in a year, you will be making 26 payments of one-half your normal monthly payment. For example, my client’s normal
payment plans do not alter the terms of your existing mortgage or its monthly accrual schedule. In other words, your biweekly payments aren’t actually getting credited to your mortgage biweekly. Huh? No. Instead, the company servicing the biweekly payment plan makes one payment each month to your mortgage company “when due” (exact language in my client’s offer). In fact, his offer states that half of the monthly payment amount (referring to his normal monthly payment) will be applied to the principal balance twice per year. In other words, the extra money is collected and held with the biweekly payment company until it equals one-half of a normal payment before it gets credited to his mortgage. So, my client would, in effect, be paying the company $1,309 ($295 upfront, plus 26 NOVEMBER 2012 | NARFE