Ask Plain Finances: Bi-Weekly Mortgage Offers - Don't be Fooled!

We want to examine a popular payment plan for mortgages that you may have seen in the past few years - the bi-weekly mortgage plan!  As you will see, this plan is a total scam...and we will show you exactly why!

What Exactly is a Bi-weekly Mortgage Plan?
The bi-weekly concept is simple:  You make a mortgage payment every 2 weeks instead of making a payment every month.  You take whatever your 

monthly payment is and then cut it in half, and start making this half-payment every 2 weeks.  Because there are 52 weeks in a year, you end up paying the equivalent of 13 monthly payments instead of 12 (26 bi-weekly payments which equate to 13 monthly payments).  

So, what are the benefits to you?  There are really only 2 main benefits:

• More Principal Paid - You end up paying 1 extra payment per year, which will means that you contribute more toward your principal.  This benefit is the most significant in terms of dollars.   This translates into you being able to pay off the principal sooner...and thus cut the mortgage term.
• Lower Interest Charges - You are not only paying an extra payment per year...you are also paying more frequently.  So, because of your more frequent payments, the interest expense charged to you is slightly less, because the bank has their payment sooner than waiting for it every month.  This benefit is much smaller than the extra payments mentioned above...but any savings is good savings.

Sounds good?  It sounds good to us too, but....

The Problem with Bi-Weekly Plans?
Lenders who offer this plan don't do it just for your best interest in many cases.  Instead, you are typically charged in one or possibly 2 ways:

• Setup Fee - Your lender will require an up front fee to set up the administration portion of the plan.  I have seen the charges range from $300 to $500 for this.  This fee is almost always charged.
• Per Transaction Processing Fee - This fee is charged for monthly servicing of the extra payments.  For example, a company might charge $2 for each bi-weekly payment.  This fee may or may not be charged.

While you do obtain the benefits that I mentioned above for this plan, there are some major problems with it.  First, the extra trouble that it will take for you to write a check every 2 weeks is a hassle (if you don't elect to do automatic withdrawals).  Second, you end up paying your lender to do something that you could easily do yourself!...You can duplicate the bi-weekly plan results without paying any of the setup and per transaction fees.

How Can I Duplicate the Bi-Weekly Plan?
It's really very simple.  Simply take your normal monthly payment and then divide it by 12. Take this amount and add it to your normal monthly payment.  Voila...you are now getting the same results as if you were on a bi-weekly payment plan.  

Let's look at an example:

Sam J. has 20 years left on his note, with an outstanding balance of $179,325, with an annual interest rate of 8%.  His normal monthly payment is $1,500.  He has decided to implement his own personal "bi-weekly" plan so that he can pay off his mortgage more quickly.  His new monthly payment will be $1,625 ($1,500 + ($1,500/12)).  If he makes this payment every month, he will duplicate the bi-weekly plan offered to him without having to pay anyone to "administer" the plan...as well as avoiding monthly payments.

But. does it really work...can it match the results that a bi-weekly plan would give to him?  Let's see the results:

As you can see, simply prepaying your mortgage every month, adding 1/12 of a payment on top of the normal payment, will give you almost exactly the same results as a bi-weekly payment plan...AND without paying having to pay the setup and monthly fees!  

WrapUp
So, basically, if you have the discipline to simply make your own payments, you can duplicate the results of the bi-weekly plan.  It's easy to do...and you will increase your net worth and your financial discipline...and see your mortgage debt paid down faster!