Guest Post – Biweekly Mortgage Payment

• Print Post
• Email Post
• Tweet this article
• Share this article

I invited Engineer to do a guest post as he helped answer many of my FICO scores on an earlier article. His site, Engineering My Finances, is dedicated to articles on personal finance and his approach to prepare for retirement. Below is his article about Biweekly Mortgage Payments so check out his site and the article!

—

A few years back, my sister told me of an offer from her mortgage company. Basically, the loan would be restructured so that 1/2 of the current monthly payment would be paid every two weeks, to align with the biweekly pay period of most people. Since there are 52 weeks per year, not 48, there are 26 paydays per year. If you make 1/2 month’s mortgage payment every payday, then effectively there are 13 payments made every year instead of 12, the loan is paid sooner, and less interest is paid over the life of the loan.

But there are more details to the offer. There’s a one-time fee of $300 to restructure the loan, and a $6 fee each month to pay for this “service”. The terms of this arrangement require that they automatically draft the money out of your checking account. (How much does that really cost?) These added fees do not reduce your balance, nor are they deductible from your income tax.

There is another approach that won’t impose the extra fees, and the cost is a little bit of planning on your part. Mark your paydays on a calendar. Approximately 1 month in every 6 will have 3 paydays instead of 2. On those months, send in an extra 1/2 month’s mortgage payment, filling out the payment coupon to indicate that the extra payment is to be applied to the loan principal. And if you really, really want to pay the one-time $300 fee and ongoing $6/month, you could add those to your monthly payments marking them to be applied to your principal. A $300 payment early in the loan would knock a few payments off the end of the mortgage period, since most of your early payments apply to interest, not the principal. (An example of the power of compounding, paying the $300 now would save perhaps $1000 in interest over the life of the loan.)

But I also told her that instead of applying any extra money to her mortgage, she should apply it to her credit card balances, which typically impose a higher interest rate and are not tax deductible in any case.

Now I see a recent article by David Bach (“The Automatic Millionaire”) at http://finance.yahoo.com/expert/article/millionaire/39312 . In it, David starts out by pointing out that those who have paid off their mortgage early were able to retire earlier than those who didn’t. Seems plausible to me. But then he goes on to use this as the basis to promote such plans as the one that I advised my sister to reject. He says that these plans cost $200-$400 to set up, and $2.50-$6.95 per payment. Furthermore, he lets on that it’s a third party who handles the transactions.

So let’s review:
– We’ve got a third party involved, which provides yet another opportunity for problems. If they don’t forward your payments, you’re the one on the hook with the mortgage company, and you’re the one out on the street or with a damaged credit report.
– Even at the low end of the setup fee range ($200), how long will it take to recover the cost? If your personal situation changes and in five years you have to sell the house, will you have recovered the setup fee and all of the per-transaction costs?
– Even at the low end of the per-transactions costs, the cost is $65/year. For $65, you can buy a calendar and at the beginning of the year spend 30 minutes circling your paydays, and note which months have 3 paydays. Then a couple of extra minutes each month when you write your mortgage check to look at the calendar you marked up to see how many paydays there were that month. So maybe an hour’s effort though the year, saves you $65 or more.

Even if you can get this service for free from the mortgage company, here are some other negatives that David Bach didn’t mention:
(1) If you have credit card debt, whether at a higher rate or possibly a slightly lower rate than your mortgage, then it makes no sense pay ahead on your mortgage. Why pay off a lower-rate debt for which the interest is possibly deductible from your taxes, when you have higher-interest and/or non-deductible debt that could be paid down instead?
(2) Entering such a plan locks you in to having to make the extra payments. By doing what I suggest, you can defer the extra payments toward principal if something happens. Such as being laid off, in which case you’re no longer getting that paycheck every two weeks.

Let me make it clear that I’m not opposed to paying ahead on your mortgage. In fact, I retired a 30-year mortgage in less than 12 years. I am opposed to taking on unnecessary expenses and risks to do so.

Yes, “automatic” is nice. But David’s so wrapped up in that theme that he won’t mention the negatives. It’s best to question the advice of media finance gurus, and not follow their advice blindly.

Tagged as: Mortgage

Promote or Save This Article

If you like this article, please consider bookmarking or helping us promote it!

Print Post | Email Post | Del.icio.us | Stumble it! | Reddit |

Related Posts

• When Mortgage Company goes out of business
• Mortgage Loan Calculator
• Disturbing Mortgage Ad from ING Direct
• Home Ownership is Still the American Dream
• Increasing Your Credit Score

Subscribe! (and Get a Mini-Course with Free Registration)

Follow me on twitter! In addition, subscribe to grab free amazing content or take advantage of the newsletter to have content delivered to you. For starters, a 7-part mini course to help you spend less and be happy will be delivered to you when you subscribe!

(Don't worry about spam, because we hate it as much as you do!)