Biweekly Mortgage Savings: Bargain or Rip-Off?

by David Forer
 
Save $32,000! Save $54,000! Save incredible money! Take 5 to 7 years off your thirty-year loan! This biweekly payment program is being heavily advertised right now for a fee of almost $400. This is a great deal for the mortgage company, but not for you. Some mortgage brokers will try and recieve an extra fee for this, money in their pocket!
 
In fact, people in the mortgage business that are ethical loan officers and brokers-- unanimously call this fee a rip-off for home owners. Here's why. You can do it yourself for free. Why should you pay a company $400 needlessly? Actually, this is quite clever on the part of the mortgage companies; they have figured out a way to get more money out of their already existing, excellent customers. A mortgage broker can probably print out a schedule of payments for you to show you how to overpay and save thousands. The key is to send in extra money and tell your bank to apply it to the principle.
 
Magicians use slight-of-hand to trick their audience. They distract people with flashy movements in their right hand, while the real trick is taking place unnoticed in their left hand. In this case, the mortgage company flashes your savings at you, making you think the "magic" is in the biweekly payment. The truth is, there is no savings by sending in money biweekly rather than monthly, and you do not save because of compounding interest, like you might think; in fact, if you read the fine print you see that they do not even credit your account biweekly, but monthly. The reason there is no savings by paying biweekly rather than monthly is because mortgage payments are paid in arrears. (This means your payment on the first of the month makes the payment due for the previous month. Mortgage payments are not like rent payments which are paid in advance; they are paid in arrears; therefore, paying days or even two weeks early does not save anything in interest.)
 
The savings comes from the fact that there are two months out of the year in which you would be making three payments rather than two. Thus, you are making two extra biweekly payments (one extra monthly payment) per year. There is no good reason why you should pay a company $400 to make an extra payment per year. It's nonsense.
 
To accomplish the same thing yourself for free, select one of these two options:
·    Option 1 (Best for people who are paid every other week)
Calculate 1/2 of your principal and interest payment. Send in that extra amount on the two months you receive three paychecks.
·    Option 2 (Best for people who are paid once a month or twice a month)
Divide your principal and interest payment by 12. Send in that extra amount each month with your payment.
 
If you are one of the majority of people who work hard for their money and pay taxes, then you don't want to spend $400-$500--and perhaps a monthly fee as well--to do what you can easily do yourself for free. You don't need sales flattery such as "You are a special customer chosen to receive this special offer," or the silly sales pressure, "Hurry and sign up before the expiration date."

 You are in charge of the terms of your mortgage. If you choose to add to the principal and pay off your loan early, you will save good money. It is simple arithmetic; there is nothing magical about sending in the money every other week. I will happily do an amortization schedule for you to show you how and when you can be mortgage free!