Biweekly Mortgage...Scam or Legit?
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 as everyone tries to "get rich quick" on the internet, these
ads are popping up with troublesome regularity.
The ads promote the "Bi-Weekly Mortgage"
and for the most part, do not come from a mortgage lender althought
their mail may look very legitimate. 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 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.
You save money. The ads are true.
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When your mortgage payment is due, your funds are withdrawn from the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
Cost of the Bi-Weekly Mortgage
-
Typical set-up fee of $195-$350
-
Transaction fee each time there is an
automatic deduction from your checking account (every 2 weeks)
-
Transaction fee when the payment is made
to your mortgage company.
-
Periodic "maintenance fee"
Best Bet!
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 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.
Plus, 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 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.
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