Bi-Weekly Mortgages, Are They Worth It?

November 10, 2009

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!

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