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Dr. Don TaylorAvoid biweekly or bimonthly mortgages

Dear Dr. Don,
My husband and I are buying our first home. We agreed to bimonthly mortgage payments with our bank, seeking the favorable amortization results this schedule provides. We just found out that the bank basically holds onto one payment and then counts both payments on a monthly basis. We realize no benefit. I think this is an unfair and despicable practice. What recourse do we have, and where can we report this?
-- Lindsay Loan

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Dear Lindsay,
It's more likely that you're in a biweekly mortgage than a bimonthly mortgage, although bimonthly mortgages do exist. A biweekly mortgage has payments every two weeks that are equivalent to half a monthly mortgage payment. You wind up paying the equivalent of 13 monthly mortgage payments per year instead of 12, and it's the dollar amount attributable to that extra monthly mortgage payment that brings down your loan balance faster, shortening the term of your loan. Bimonthly means paying once every two months, and it wouldn't change the amortization on the loan and wouldn't result in any savings. See an earlier Dr. Don column for a little more information on biweekly loan programs.

The typical mortgage loan is designed to meet Fannie Mae and Freddie Mac standards for loan underwriting. Keeping mortgage loans conformed to these standards makes it easier to package and sell these loans as mortgage-backed securities. While it's true that not every originating lender is going to sell its loan portfolio, most will still follow these standards.

A biweekly or bimonthly loan isn't going to fit the mold, so biweekly and bimonthly loan programs are designed by lenders as an add-on service to borrowers. The loan servicer collects the more-frequent payments and passes them on to the lender as whole (monthly) payments. Service fees for the program and any interest earnings accrue to the service provider, not to the borrower.

If you haven't closed on the loan, you should be able to restructure the loan so that you don't make biweekly or bimonthly payments. If you've already closed on the loan, it's going to be harder to change things. Since this is most likely an add-on structure that the originating lender added to the loan, and is not required by the mortgage investor, try negotiating with the originating lender to change to a monthly payment.

I would be very surprised to find out that you did not receive adequate disclosure about the more-frequent payment plan, including the lender's practice of holding on to the more-frequent payments and then making monthly payments on the mortgage. I'm not sure you'll find many sympathetic ears when complaining about the lender's program. If the originating lender is a national bank you can complain to the Office of the Comptroller of the Currency. The Better Business Bureau and the Federal Trade Commission are two other good choices. A little pressure could get you out of this payment arrangement and back to a traditional monthly mortgage payment.

Refinancing to get out from under this situation is a lot more expensive than staying in the existing mortgage. If you don't plan on being in the house a long time, then grin and bear it. If you do plan on being in the house for a while, look at Bankrate's refinancing calculator to see what the payback is on refinancing to avoid the service fees. The threat of refinancing the mortgage may convince the service provider to rescind the more-frequent payment arrangement.

-- Posted: July 13, 2005




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