To make, or not to make biweekly mortgage payments: that is the question facing many conflicted homeowners today.
With alluring ads asserting the plan takes years off your mortgage and saves on interest, a biweekly plan is a persuasive package for individuals eager to pay off their homes.
But when you pull back the ribbons and pretty paper, the decision gets dicier.
Read on to see the advantages and disadvantages of a biweekly mortgage as we settle the debate once and for all.
First Things First: How It Actually Works
Before we dig into the pros and cons, let’s break down how a biweekly mortgage payment really functions. It might not operate exactly how you think it does.
There are 52 weeks a year, so if you pay half of your total monthly mortgage payment every other week, you end up making 26 payments.
If you pay twice a month all year on a traditional mortgage, you make 24 payments in that time.
The biweekly method of mortgage payments actually causes you to make two extra “half” payments per year, or the equivalent of one extra monthly payment over the course of the year.
So far so good, right? Let’s look at some of the pros and cons beneath the surface.
Why You Might Make Biweekly Mortgage Payments
To highlight the merits of a biweekly plan, let’s look at an example.
Here’s what a biweekly mortgage payment looks like in action:
If your mortgage is $1200 per month, you pay $14,400 per year in once-a-month payments. If you decided to send biweekly payments instead, then you would send $600 every other week.
It sounds the same until you realize you’ll be sending 26 payments of $600 instead of 24 payments of $600.
The extra $1200 is applied to your mortgage principal, which pays your mortgage off sooner and reduces the amount of money you pay for interest.
The larger your mortgage, and the higher your interest rate, the greater your savings. To give you an idea, on a $100,000, 30 year fixed mortgage with 6.5% interest, you can expect about $127,544 in interest on top of the $100,000. If you pay half the mortgage payment every two weeks instead of making once-a-month payments, you save over $30,000 in interest!
- As common sense and the example above show, biweekly mortgage does pay off your mortgage faster. Say you’re paying a 30-year traditional mortgage. With a biweekly plan, you could be finished in around 26 years. Who doesn’t want to own their home and be debt-free in the shortest amount of time possible?
- Biweekly mortgage payments work well with budgets. You pay the same amount, from the same place, at the same time every two weeks.
- You could save on interest since the payments are geared towards the principal.
- You’re building equity. Technically, since you’re making payments every other week as opposed to every month, you own more of your property quicker.
At this point, you might be asking yourself where you can sign up.
Don’t Google those enrollment plans just yet, because you’re about to see the other side of the coin.
Why You Shouldn’t Make Biweekly Mortgage Payments
Above was an example of an ideal biweekly mortgage plan. We’re now going to turn to an instance highlighting the dark side of biweekly payments.
Search the terms Paymap and 2015, and you’ll be met with a slew of articles detailing their payout to disillusioned homeowners on biweekly mortgage plans.
That year, the Consumer Financial Protection Bureau charged the Western Union subsidiary $5 million and required them to pay back over $33 million in fees to customers.
Why? The fees tied to the biweekly mortgage plan were unjustified and the estimated savings on interest they marketed were baseless and wildly exaggerated.
Let’s dig into those points and a few more reasons you shouldn’t (exactly) make biweekly mortgage payments.
- Fees. Not all, but some banks and third-party finance managers do charge you fees to enroll in a biweekly mortgage payment plan. Worse still, a number of them charge continued transaction fees.
- Exaggerated Benefits. The Paymap case is a great point of reference here. Many biweekly payment programs tout impressive numbers with questionable methodology. Just because the Smiths saved over $33,000 (the number Paymap advertised) on interest doesn’t mean you will. On a similar note, a lot of companies claim you’re paying down your principal every two weeks but actually only submit your payment to the mortgage servicers monthly.
- You Pay More. While making 26 payments a month means you finish paying your mortgage earlier, it also means paying more. A full extra mortgage payment a year can put a strain on homeowners budgeting for a multitude of expenses.
- It’s Not Ideal for the Unexpected. Job loss, health problems, and accidents are inevitable. Despite the draw of a biweekly mortgage when life runs smoothly, it can be detrimental to one’s credit and well being in trying times.
Are you a bit skeptical about biweekly mortgage payments at this point? If so, we’re with you.
It’s an incredibly enticing idea: if you budget for an extra payment each year and pay your mortgage twice a month, you’ll own your home sooner and save on interest.
With any financial decision, though, you have to weigh all the factors.
With biweekly mortgage payments, it’s not the premise that’s flawed, but the fine print.
So what if you’re intrigued by the idea but cautious because of the red tape?
Do It Yourself.
Here’s what it boils down to: With a biweekly plan, you’re essentially paying for automation and trapping yourself contractually.
As long as there is no penalty for paying off your mortgage early, nothing is stopping you.
If the perks of biweekly payments appeal to you, ditch the third-parties, contracts, make your own biweekly payments, and reap the benefits, no fees needed.