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Bi-weekly mortgage programs, are they legit?
By Michael Wayland | May 28, 2008
Have you received an advertisement offering to save you thousands of dollars on your 30 year mortgage and cut years off your payments? With email “spam” becoming more pervasive, these ads are popping up with increasing regularity. But are what they’re selling legit, or just another scam?
Many of the ads promote the “Bi-Weekly Mortgage” and generally, do not come from a mortgage lender, even though their email may look very legitimate. Exclamation points punctuate practically every promise they make:
- 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 the matter of 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 easily do on your own, free of charge.
The Basics:
Normally, you make 12 mortgage payments a year. Since there are 52 weeks in a year, a bi-weekly mortgage equals 26 half-payments a year. The equivalent would be making 13 mortgage payments a year instead of 12. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments and generating less interest charges.
You will save money. The ads are truthful about this.
How it Actually Works:
You cannot simply mail in half a payment every 2 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 bi-weekly mortgage company is an intermediary between you and your mortgage lender. They automatically debit your checking account every 2 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 2 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 When your mortgage payment is due, your funds are withdrawn from the trust account and forwarded to your mortgage lender.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. The extra payment is applied directly to your principal balance.
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 bi-weekly program. That is a lot of money.
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 bi-weekly payment company, you may find yourself digging into your personal savings to make the payment directly — even though the bi-weekly payment company has already collected your funds.
The Typical Cost of the Bi-Weekly Mortgage:
- Typical set-up fee of $195-$350
- Transaction fee for every automatic deduction (every 2 weeks)
- Transaction fee when the payment is made to your mortgage company.
- Periodic “maintenance fee”
No-Cost Alternatives to the Bi-Weekly Mortgage:
Instead of hiring a company to manage your bi-weekly payment, you could accomplish essentially the same thing on your own for free. Just take your monthly payment, divide it by 12, 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 the loan would be paid off approximately three months quicker than with the bi-weekly 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.
Conclusion:
The bi-weekly mortgage plans do not really do anything except move your money around and charge you for it. In addition, you must trust someone else to hold your money and pay your mortgage on time 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 bi-weekly 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.
Topics: Articles, Consumer Help, Tips, protection
