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Biweekly
mortgages have been touted by many companies as being an excellent
way to save money and pay off your mortgage earlier. Some companies
even claim that "it won't cost you any more than you're paying
now." What a crock! What do you think a true biweekly mortgage
saves you? I'm talking about the savings from paying more
frequently. Well, it doesn't save that much at all. Hold on to your
calculators. We're going to use our brains and look at this problem
very carefully. Here is something these biweekly mortgage
salespeople don't want you to do.
A $100,000 mortgage at 8% for 30
years has a monthly payment of $733.76. That's 360 payments of
$733.76 or a total of $264,155 at the end of 30 years. A true
biweekly mortgage with 780 payments (26 payments per year) has a
payment of $338.52, which totals $264,041 after 30 years of
payments. Check out how much you saved by paying biweekly-that's
right, only 114 bucks ($264,155-$264,041)!
So, if paying more frequently isn't
what creates the savings, how can these companies claim to save you
big money? They use the "biweekly" word to imply that
increased frequency of payment can save money, when the real way they
show the savings is by making you increase your payments.
They do a little math trick to force
you to pay more, and that trick is to divide your mortgage in half
and make that result the biweekly payment. The problem here is that
26 half-payments equal 13 whole-payments or an extra month's payment
each year. Obviously, if you pay more money, you reduce your
mortgage faster.
Let's go back to my original example.
Notice that half the monthly payment of $733.76 is $366.88. If you
pay $366.88 every two weeks, it only takes around 23 years to repay
the $100,000 and costs a total of $217,853. So it seems like you
save money by paying more frequently, but in reality it's the extra
money that reduces the mortgage faster.
This is a forced-discipline mortgage
repayment plan. Not only requiring you to increase your payment, but
how frequently you make those payments. Under the biweekly mortgage
plan, you make 26 payments per year instead of 12. Now you're writing
14 more checks each year. Isn't that fun, yeah, just what you always
wanted, 14 more bills to pay each year! And to gain what? Nothing
you can't do yourself.
 But the
absurdity
doesn't end here. Most biweekly mortgage companies actually want to
charge you for this entire setup! That's right, most companies
charge an up-front fee and a monthly service fee.
The monthly service fee is so they
can debit your checking account every two weeks and you don't have
to write the checks. That sounds to me to be an advantage for them!
They get your money guaranteed since they can take it from your
account at will. I think you should charge them a fee for that
privilege!
Recently, a company attempted to sell
my uncle on refinancing his current mortgage into one of these
biweekly farces. Get this, their interest rate was higher than his
current mortgage! But, the saleswomen argued, "interest rates
don't matter…look at how much you save."
"Interest rates don't
matter!" How can she get away with that direct lie?
Let's look at the numbers. Refer
again to my first example of $100,000 for 30 years at 8% with a
monthly payment of $733.76 that costs a total of $264,155 to repay.
She said something like, "even though the biweekly payment is
$366.88 (half the monthly payment), you can afford to add a little
more…how about another $50? That raises your biweekly payment to
$416.88."
Her company's rate is 9% and with
payments of $416.88 ($366.88+$50) the total cost to repay the
$100,000 is $214,026. The savings look like $50,128 (the difference
between $264,155 and $214,026). Then there's the $500 up-front fee
and the $3 per-payment fee that they don't include in the total cost
of the loan.
 So how much would this truly cost my
uncle if he signed up for this rip-off plan? When you include all
the fees of the biweekly plan, it comes to $216,068. He always has
the option to pay $903.24 monthly toward his current mortgage. That
$903.24 monthly payment is the equivalent of paying $416.88
biweekly. At $903.24 he can pay his current mortgage off for a total
cost of $182,093. And that's with no special plan, fees, extra
payments or, in other words, no smoke and mirrors.
Look at that figure ($182,093). They
tried to sucker him into a complex financial scheme that would cost
$216,068! That rip-off plan would have him paying nearly an extra
$34,000 compared to doing it on his own!
There are also considerations, such
as other debts. If you have credit-card debts with interest rates
greater than your mortgage rate, it makes sense to pay back the
credit cards first. Similarly, if you have investments earning more
than the interest rate of your mortgage, it's best to continue
investing. Also, because of inflation, your future payments toward
your mortgage are less when compared to current dollars. For
example, my parents' mortgage was $198 when they purchased their
home in 1969. This amount was a lot for that time but doesn't seem
like much now. The good news is that your $800 mortgage payment will
seem like peanuts in 30 years.
Let's look at the pros and cons of
the biweekly mortgage through third-party companies. Cons: (1)
probably costs far more than doing it yourself, (2) more CON-fusion,
(3) forces you to pay earlier, (4) less flexibility in mortgage
payments. Pros: (1) Gee, I can't think of any…I guess if you want
to be forced to pay off your mortgage early, and enjoy giving
someone a fee to force you to, then it's good.
My opinion is that if you want to pay
your mortgage off early and save money on interest, then add some
extra money to your monthly payment. This way, if for some reason
you have trouble making the new payment, you always have the option
to make the old lower payment, plus you retain more control over
your money.
Or if you really want to be forced to
pay your mortgage off early, then ask you current bank if they can
set up a direct payment plan that includes your extra principal
payment. As long as they can do this for free, then give it a try.
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