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The Biweekly Mortgage - Who Needs It?

Have you received an advertisement offering to save you thousands of dollars on your thirty-year mortgage and cut years off your payments? With email spam becoming more pervasive as everyone tries to get rich quick on the Internet, these ads are popping up with troublesome regularity.

The ads promote a Biweekly Mortgage and for the most part, do not come from a mortgage lender. Exclamation points punctuate practically every claim:

  • No closing costs!
  • No refinancing!
  • No points!
  • No credit check!
  • No appraisal!
  • Save thousands!
  • Cut years off your mortgage!

To achieve these wonderful savings all you have to do is allow half of your mortgage payment to be deducted from your checking account every two weeks. It’s easy. Of course, there is a small set-up fee and usually a transaction fee with every automatic deduction.

Essentially, the ads are truthful in almost every respect.

They just want to charge you money for something you can do on your own for free.

The Basics:

Normally, you make twelve mortgage payments a year. Since there are fifty-two weeks in a year, a biweekly mortgage equals 26 half-payments a year. The equivalent would be making thirteen mortgage payments a year instead of twelve. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments.

You save money. The ads are true.

How it Actually Works:

You cannot simply mail in half a payment every two weeks to your mortgage lender. Since they do not accept partial payments for legal and accounting reasons, the mortgage company would just mail your half-payment back to you.

Instead, the biweekly mortgage company is an intermediary between you and your mortgage lender. They automatically debit your checking account every two weeks for half of your mortgage payment then place your funds into a trust account. Basically, this is just a holding account for your money. In another two weeks, there is another automatic deduction from your checking account, and so on. When your mortgage payment is due, your funds are withdrawn from the trust account and forwarded to your mortgage lender.

Since you are placing funds into the trust account faster than your mortgage payments are due, you eventually accumulate enough money to make an extra payment. The way the cycle works, this occurs once a year. he extra payment is applied directly to your principal balance, which causes your loan to amortize faster, pay off more quickly and save you thousands of dollars.

Potential Problems with the Trust Account

Because your funds are held in the trust account until your mortgage payment is due, there are potential dangers. Not only are your funds held in this account, but so are the funds of everyone else enrolled in the biweekly program. That is a lot of money.

Most likely, there will be no problems.

However, if there are accounting errors, mismanagement, or even fraud, your mortgage payment might not get made. The first hint of a problem will probably be a phone call or letter from your mortgage lender, but not until after your payment is already late. Since responsibility for making the payment rests with you and not the biweekly payment company, you may find yourself digging into your personal savings to make the payment directly -- even though the biweekly payment company has already collected your funds.

Later you can work out the trust account problem with your biweekly payment company.

The Cost of the Biweekly Mortgage

There is usually a set-up fee that runs between $195 and $350, depending on how much sales commission is paid to the individual or company setting up the account for you. You also pay a transaction fee each time there is an automatic deduction from your checking account and sometimes also when the payment is made to your mortgage lender. There may also be a periodic maintenance fee.

Meanwhile, whoever controls the trust account is earning interest on your money.

Savings of the Biweekly Mortgage

By making principal reductions using the biweekly mortgage program, your mortgage will amortize more quickly, saving you money. How quickly your loan pays off depends on your interest rate and when you begin making the biweekly payments.

On a $100,000 loan at an interest rate of eight percent, your first principal reduction would probably be a year from now. Assuming the principal reduction is equal to one monthly payment ($733.76), you would save $43,852 over the life of the loan and pay it off almost seven years early.

However, you have to deduct from those savings any amounts you paid in set-up, transaction, and maintenance fees.

No-Cost Alternatives to the Biweekly Mortgage

Instead of hiring a company to manage your biweekly payment, you could accomplish essentially the same thing on your own for free. Just take your monthly payment, divide it by twelve, and add that amount to your monthly mortgage payment. Be sure to earmark it as a principal reduction.

The first way you save is that you do not have to pay any fees to anyone. It’s free.

In addition to not paying fees -- using the same example as above -- your total savings on the mortgage would be $45,904. Plus the loan would be paid off three months quicker than with the biweekly mortgage. The reason you save more is because you are making a principal reduction each month, instead of waiting for funds to accumulate so that you can make one principal reduction a year.

Self-Discipline?

The biweekly mortgage companies claim that homeowners are not disciplined enough to follow through with principal reduction plans on their own. They suggest the reason for setting up the biweekly mortgage enforces discipline upon you, and by doing so, they save you money.

However, in this technologically advanced age, banking online and automatic deductions are readily available. You can set up your own automatic deductions including the additional principal reduction and have it go directly to your mortgage lender. Since the deduction occurs automatically, just like with the biweekly mortgages, self-discipline is not a problem. Once again, you don’t have to pay anyone to do it for you and you save even more money.

Conclusion

The biweekly mortgage plans do not really do anything except move your money around and charge you for it. Plus, even though the danger is negligible, you must trust someone else to hold your money for you. If you can do the very same thing for free, plus save yourself even more money by doing it on your own, why pay someone else?

The biweekly mortgage plan - who needs it?

If your goal is principal reduction and saving money, then it is a good plan. If you do it on your own instead of paying someone else to do it for you, then it is a great plan.

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Sandra Cullinan
Vice President/Associate Broker

Meybohm Real Estate
6004 Evans Town Center Blvd.
Evans, GA 30809
Office: 706-863-8218 
Extension: 2471
Fax:  706-855-7847
Cell:  706-533-3353
Email:  scullinan@meybohm.com

 

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Sandra was very friendly, helpful and honest, she worked very hard! Mr. Schlabach
Sandra was very helpful and made sure that we understood everything that was going on during the whole process. We had a great experience with her. She also kept us very informed through the whole process. She was very friendly and knew exactly what she was talking about when it came to helping us out. We would recommend her to anyone! She is AWESOME!! Mr. Lunz
Sandra did a terrific job! We were under tight time constraints and she made sure we saw lots of homes- all of which met the criteria we provided! Mr. Guay and Mrs. Madden
Sandra Cullinan was wonderful! She made my first home buying experience wonderful as well! Great job! Ms. Altman
Sandra Cullinan is by far the best agent I have worked with in over 7 home purchases! Great experience! She is very knowledgeable in the market, best in the Augusta area! Mr. Allen T. Berry
Sandra Cullinan made our selling and buying a smooth transition. I have recommended her to several friends. She was WONDERFUL! I have dealt with other real estate companies. Meybohm has been the best! Communication was excellent!! Thank you Meybohm!! Mr. and Mrs. Chris Pryor
Sandra had excellent knowledge of the local real estate market, builders and neighborhoods. We looked at a lot of houses and I got a great house at a good price. Cannot ask for much more than that! Mr. Brett A. Paye
I would recommend Sandra because she was knowledgeable regarding short sale and other services I wanted to take advantage of. Also, she and her assistant Andrea consistantly handled themselves professionally and friendly. Not only did we give them a deadline that we had to sell due to military, there was also the added irritant of Chase Bank. With all this, yet Sandra met every challenge and excelled. Thank you. Mr. and Mrs. William T. Payne
Excellent service, friendly and knowledgeable! Mr. and Mrs. Marc Gianotli
Sandra Cullinan was a great help to us and was looking out for us with the sale. We have sold a home and purchased a home with Sandra. When we are ready to sell again (2-5 years), we will search out Sandra Cullinan. Mr. and Mrs. David A. Pierce
Sandra Cullinan is the best realtor in all of Augusta, maybe even the country. What a wonderful, caring, knowledgeable agent she is and truly an asset to Meybohm Realty- She ROCKS! Marilyn B. Altman
Sandra Cullinan went above and beyond her duties. She is a God send person. I will have her to purchase a new house in the future. Thank you for all your services. Patricia Washington
During our house hunting process we were able to see many homes without feeling the pressure of closing the deal. Our agent's goal was for us to find the right house and not just sell a house. Mr. Saman Nazar Zangana
Honest, great knowledgeable sales people Pamela B. Kennedy
Prompt service Tony E. Meade
Very early as we were simply being introduced to Augusta and the real estate market, we were not particularly pleased with service. With our connection to Sandra Cullinan however, we found energy and an accurate assessment of what our thoughts on what we bought. Mr. and Mrs. David L. Barcus
Sandra and Andrea were very helpful throughout the entire process. They constantly communicated with me via email and phone calls while I was doing my house hunting. My wife and I are very pleased with our new home! Thanks Sandra, Andrea and Meybohm! Mr. Anthony Weaver
Sandra and Andrea did a great job! Jill Churchill
Our home buying experience went very smooth. Mr. and Mrs. Hyun Ha
Excellent service, very knowledgeable and professional service, will definitely use Meybohm in the future! Ronald C. Blue
Sandra and Andrea were wonderful to work with. They made the entire process easy and stress free! Mr. and Mrs. Jansen Johnston
"It was so nice to find an agent like Sandra Cullinan. We lived out of the area and my husband was ill much of the time,This placed an added burden on Sandra to make sure that our property was always ready to show, which she handled with grace and compassion. When we needed to have repairs done she was our go between with the workers. She was always available by phone or email and was prompt in her response. I would highly recommend Sandra Cullinan to anyone needing a real estate agent. " Barbara Rollins, Orlando, Fl.
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