Those Amazing Bi-Weekly Loans

Many periodicals have full pages ads telling of how you can "drastically reduce your total interest payments by thousands of dollars!" simply by shelling out a couple hundred dollars to an honest firm that wants to save you money with bi-weekly mortgages!

These places are not necessary. You can do it all yourself for free (as long as your lender accepts pre-payments which most do.) What the bi-weekly mortgage firms usually do is set up an electronic transfer from your bank account that pulls out one half your normal monthly mortgage amount every two weeks. In this manner you in essence pay off your annual obligation to your lender in 48 weeks. Then in the last four weeks of the year, they pull out two more half payments and use this to prepay the principal of your mortgage. Therefore for the next year the principal of your loan has been reduced by the full amount of your monthly payment. Over time this will drastically reduce the total length of your loan as well as the amount of interest you pay.

You can perform this calculation yourself on the WWW Mortgage Calculator by entering the letter B in the Annual Prepayment field.

NOTE: There is some argument whether it is smarter to pay down your mortgage or use the money you would do so with and invest it in a higher yielding investment (e.g. mutual funds). That all depends on if you think you can earn more than you are paying for the interest. Many people believe that your home mortgage is the cheapest money you can ever borrow so instead of paying it off, you should use it to earn more. Others are more conservative and can't imagine spending all that money on interest, and believe in reducing the duration of your indebtedness. I can understand both points of view and leave it a personal decision for people with different types of financial views. Here is a calculator to see for yourself.

But I am open minded too!

Here is a response I received which does make some valid points:

Whereas I commend those people who have the discipline to do it themselves what about those who lack that attribute? I'm sure you are aware that some companies also include an audit which in a lot of cases can be invaluable!

I personally have encountered many who say they can do it themselves, after I have counseled them on the methods to use and yet six months later they have not even taken the first step! These type of people have strong egos, but no discipline!! What about them? Yes there are some companies that might misappropriate funds, but there are at least two that I know of that are strictly governed and could not even if they wanted to. So please don't mislead these people that truly need this type of service into thinking "I can do it myself"!

Another Point

I not too long ago received a phone call from someone who was trying to do a "self converted" biweekly payment schedule and complained that their lender would not accept the payments every two weeks since that did not meet her minimum payment. So the lender would just hold the check until the full monthly payment came in. So in fact the borrower was not gaining anything by doing the biweekly schedule.

The solution? Instead of actually paying the half a payment every two weeks, you pay 13/12 of your monthly payment every month, on time as the lender expects. This way you pay your minimum payment every month and that extra 1/12 a payment pays down your balance by that amount every month. This means you make the exact same amount to the lender as you would with a biweekly schedule, just in 12 monthly payments.

   26 x 1/2 payments = 12 x 13/12 payments = 13 payments

So this is one way to achieve the same goal on ANY loan that allows monthly prepayment. So if your regular monthly payment is $1000 a month, instead of paying 26 $500 every two weeks, just make 12 monthly payments of 13/12 X $1000 = $1083. Of course, you can increase that to whatever amount you can afford, the more you prepay every month, the shorter your loan will last and the less total interest you pay.

DISCLAIMER

These views are all my own; I don't mean to discredit those people trying to feed their families by offering these biweekly schedules. There are many worse ways to spend your money! You would still save much more than you would spend if you paid your mortgage payments through these companies, assuming they all really do pay off your mortgage in the proper manner.