Bi-Weekly Mortgages, Deal or No Deal…
DEAL- The benefits of a bi-weekly mortgage
- Faster Equity Build Up
- Pay Less Interest
- Easy Automatic Withdraw
- Easier to Budget
NO DEAL- The cons
- Higher Rates
- Increased Fees
- Less Flexible
- Higher Annual Payments
OK… What gives? Is it a good deal or not?
On a normal mortgage your payment is posted 1 time per month… It’s due on the 1st and generally will have a 15 day grace period but the posting is adjusted on the 1st. So if you pay your mortgage early on the 25th or later on the 10th your payment is posted on the 1st and this is when your interest and principle + any pre-payment will be applied. Basically a 30 year mortgage is a series of 360 payments with a fixed payment. If additional principal is paid it will reduce the balance which will reduce the interest portion of your next payment (Bal x % /12 = interest portion). Your total payment remains constant resulting in a quicker amortization. (pay off sooner)
Now let’s look at what a True Bi-Weekly mortgage is and how it works. A Bi-Weekly Mortgage is about Posting. There is no grace period and it must be drafted from your account every 2 weeks and Posted to your account. This quicker Posting results in a reduction of interest on the unpaid balance as well as making 26 payments per year which would be about equal to 13 monthly payments so you are also adding principal compared to a normal loan.
This can be a great deal but be careful.
NOTE: You can not make a regular mortgage into a Bi-Weekly by making extra payments because the POSTING periods cannot be changed!!
Here’s the problem. Many lenders charge a higher rate for a Bi-Weekly negating much of the posting benefit. Some lenders and some third party companys will try to sell you a Bi-Weekly payment program wrapped around an existing mortgage… Several hundred dollar fee upfront and cost per draft… Save your money and just divide 1 payment by 12 and add that to your regular monthly payment and avoid all the additional cost. Be Careful… some lenders will use Bi-Weekly to sell negative amortization type loans which could lead to trouble unless you fully understand them
If the payments work and you can find a TRUE Bi-Weekly at the same rate as a comparable regular loan then it may be a great deal… but make sure you fully understand how it works.
By Bill Frantz