Should you set your mortgage up on a bi-weekly mortgage plan? It depends:
When you take out a new mortgage, chances are your mail box will get flooded with offers for Bi-weekly mortgage plans. These sales pitches will preach the benefits of paying 1/2 of your mortgage payment every other week. Using data on your new mortgage that’s mined from the public records (all mortgages are recorded), some of these direct mail marketiers will try to trick you into thinking they’re somehow affiliated with your new lender.
Here’s the pitch: with 52 weeks in a year, over the course of a year you’ll end up paying an extra full monthly payment to reduce your principal balance. (26 one-half payments = 13 whole payments.) You’ll save thousands – maybe tens of thousands – over the life of the loan! That’s the bait and hook anyway. The switch is most of these programs come at a cost. The third party 
companies promoting bi-weeklies charge up-front set up fees of several hundred dollars and/or ongoing “transaction fees” of anywhere from $4 to $9 per transaction. These fees will slow down the interest-saving benefits you’re trying to realize by paying 1/2 your mortgage every other week.
My question is: Why pay someone to do what you can do on your own with a little effort and planning?
Never use a third-party to handle your mortgage payments. It’s just not a good idea. In almost all cases, they just take your 1/2 payment every other week, park YOUR money in THEIR interest-bearing account, charge you a transaction fee and then pay your lender for you just once a month anyway. Yes, they’re paying a little extra toward your principal but so what. Read below for tips on how you can take charge and do this yourself. It will take no more effort than setting up with a third party company.
Start with Your Lender:
Some major lenders offer their own bi-weekly plans that may or may not cost any money. Bank of America currently charges $4 per transaction for a bi-weekly. (They do not offer the program if you have an Adjustable Rate Mortgage though.) Wells Fargo on the other hand does not currently charge anything for their bi-weekly plan.
If you’re interested in the “equity acceleration benefits of a bi-weekly payment plan, start by checking with your lender to see what, if any, options they have internally. Most lenders’ websites provide this information. Just log on to your account, find the search field, type in “bi-weekly” and see what comes up. Call Customer Service for follow up questions.
Again, I’m adamant about not paying any fees whatsoever for the “right” to pay your mortgage off faster. If your lender does charge fees, here are a couple strategies to achieve the same results without incurring any fees:
Do it Yourself:
Strategy 1: Simply pay 1/12 of your principal and interest payment extra every month. Still make your payments once a month. By the way, as a general rule I don’t recommend paying any extra toward your mortgage until you’ve paid off all of your other consumer debt (credit cards especially but also car loans, personal loans, Home Equity loans, student loans, etc.) Why pay a loan that likely has the lowest rate of all of your debts and has interest that’s tax deductible before everything else is paid off? There are exceptions of course.
Strategy 2: If you get paid every other week and, from a cash-flow standpoint, you like the idea of paying your mortgage every time you get paid, here’s what I recommend: First, set up a separate, interest-bearing checking account or savings account (make sure it’s Free) at your bank or credit union. Second, if you’re paid through auto-deposit, ask your employer if you can split your deposit into two (or more accounts). If yes, set it up so that 1/2 of your normal monthly payment amount gets auto-deposited in to the separate account opened at your bank/cu. Third, set up a monthly auto-debit of that account to pay your mortgage payment equal to your normal payment plus 1/12 of that payment.
For example, if your minimum monthly payment is $1,400 per month, have your payroll department deposit $700 of your net pay every two weeks into your “mortgage savings or checking account”. Then simply schedule your monthly payment to be $1,517 ($1,400 + $1,400/12). When you first open your account, just be sure to deposit enough seed money to ensure there’s enough there to make that first higher payment.
This strategy allows you to avoid any set up or transaction fees AND earn a little interest on your money while it’s in the account. You’re still in control of your money and when your mortgage payments are made. And, it shouldn’t cost you anything. Automating it all takes care of the self-discipline issue.
These are just two example strategies. There are a lot of ways to accomplish your goal of paying off your mortgage faster. I’d love to hear about other cost-effective ways to do it.
A final note and reminder, whatever you do, make sure you’ve considered all the other aspects of your finances before you pay extra on your mortgage. In addition to paying off other debt first, you should have 3 – 6 months in emergency reserve savings. Also, make sure you’re investing funds for retirement too. What good does a pile of idle, zero interest bearing home-equity do you if you don’t have any money to live on?
Mike Anderson has written 9 articles on MasterMoneyTips.com
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