Bi-Weekly Mortgages, Are They Worth It?

I am frequently asked about bi-weekly mortgage programs and whether or not they are a good choice.  As my readers know, I always like to give the short and sweet answer first which is NO, they are not.  But for those looking for an explanation I offer an in depth look at why they aren’t a good deal.  Yes, they pay off a loan quicker and accelerate equity build up.  But they often come with a price that is unnecessary as you can accomplish the same thing on your own using simple math.

A bi-weekly mortgage is set up so that your mortgage payment is automatically debited out of your checking account every two weeks, thus making 26 payments a year.  This is actually just one additional payment per year (26 payments divided by 2 equals 13 payments a year instead of the normal 12).  Of the bi-weekly mortgages we offer, most come at a higher rate, typically .25% higher.  Some even have set-up fees and ongoing monthly “administrative” fees. 

Using a loan amount of $150,000 at 6% over 30 years set up as a bi-weekly loan, it took off 5.6 years paying the loan off in 24.4 years.  It also saved $32,855 in interest versus a traditional 30 year loan.  This assumes you stay in this mortgage for a long time to reap the benefits as well as recoup any fees associated with the loan.

Now what happens when you just make one extra payment a year on your own?  Using the same numbers as above, $150,000 at 6% over 30 years is $899 P&I per month so that would be an extra $899 a year.  But what if you just don’t have an extra $899 left over at the end of the year, especially around the holidays?  Well, the good news is you don’t have to.  The trick is, divide the monthly P&I payment by 12 and add that to your monthly payment each month (using round numbers, $899 divided by 12 equals $75 so the total monthly payment would be $974)  This scenario takes off 5.4 years and pays the loan off in 24.6 years, slightly longer than the bi-weekly.  But the real benefit is that you save $36,853 which is $3,998 more than the bi-weekly due to the way the loan is compounded.

So don’t be fooled by the touted advantages of the bi-weekly loan.  Use simple elementary level math to do the work for you!

1. APR…Annual Percentage Rate or Another Phony Rate?
2. Higher Rate, Lower Fees or Lower Rate, Higher Fees?
3. How Recent Market Changes Can Affect You
4. Rates Are Based on Your Credit Score and Equity
5. Should I Escrow Taxes and Insurance Or Pay Them On My Own?