Retirement with a Mortgage Case Study: Biweekly Payment Plans - Myths, Misconceptions and Alternatives
Maybe you are considering or paying on a mortgage every two weeks, in most cases, the loan servicer is paying the loan monthly. A consumer who buys into a biweekly plan is actually loaning the servicer half of your mortgage payment, interest free, for at least two weeks every month.
In addition, the convenience of biweekly payment programs comes at a cost. Of the top five mortgage-servicing institutions, four charge enrollment fees that range from $295 to $379. Three also levy additional charges on every transaction. If your elect to pay biweekly , thus avoiding the hefty upfront charge, fees from the same top five servicers range from $4 to $9 a month.
The truly beneficial aspect of biweekly mortgage payments is the two additional half-payments going toward the principal each year. In other words, by making 26 biweekly payments, you are effectively making 13 monthly payments instead of the customary 12. Depending on specific loan terms, one extra payment a year may enable you to pay for your home an average of six to eight years ahead of schedule
Myth #2: Paying twice a month reduces the mortgage’s compound interest.
A true biweekly mortgage, set up at loan origination or during refinancing, is rare, and is not offered by all lenders; however, it is possible to get many of the benefits of a biweekly payment schedule without the extra costs.
- paying an additional one-twelfth of the mortgage payment each month, while specifying on the payment stub or coupon that the amount should go toward the principal.
- inquiring about the option of sending a half-payment every two weeks without enrolling in the bank’s biweekly program.
- adding the equivalent of one extra payment to the mortgage, possibly from the proceeds of a bonus or tax refund. The consumer should specify that the additional money is meant to go toward repayment of the principal.
- for borrowers who are paid biweekly, taking half of the amount of the mortgage payment from each paycheck and putting it in a savings account, then using all of the funds in the account to pay the mortgage each month. At least twice a year, the borrower will be including the equivalent of an extra half-payment.