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Paying for biweekly mortgage program makes no sense

Numerous companies say they will save you lots of money by setting up biweekly mortgage payments. All you have to do is pay an enrollment fee of a few hundred dollars, and often a monthly handling fee, and the payment company will handle the rest.

It doesn't make financial sense.

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"Don't pay any money to a third party to help you set up a biweekly mortgage," says Anthony Hsieh, chief executive of Home Loan Center, a California-based online lender. "People look for ways to get you to write a $195 check."

Most biweekly payment companies charge more than that. But you don't have to pay a hefty enrollment fee to reap the benefit of making half a mortgage payment every two weeks. To understand why, you need to know what biweekly payment companies do and, just as important, what they don't do.

In short, what the companies do is help you make an extra mortgage payment each year. That can save thousands of dollars and shave years off a 30-year loan. What they don't do is apply payments immediately to your loan balance.

When you enroll in a biweekly payment program (one of the most popular is called Equity Accelerator), you authorize the company to debit your bank account electronically every two weeks. The money goes into an account controlled by the payment company. When the company has debited your account twice, it has enough to make a full payment, which it sends to your mortgage servicer.

The magic of biweekly payments is based on the fact that there are 52 weeks in a year. When your bank account is debited every two weeks, you make 26 half-payments a year -- equivalent to 13 monthly payments.

An extra payment a year makes a big difference. For example, someone who borrows $100,000 at 6 percent interest for 30 years would pay a shade under $600 a month principal and interest. Let's say taxes and insurance bring the monthly payment to $1,000. By making an extra $1,000 payment every year, a borrower would pay off the mortgage in 22 years, 2 months, knocking almost eight years off the loan and saving about $34,000 interest. (Use the mortgage calculator to work your own scenario.)

Save cash by doing it yourself
There are several ways to make an extra payment each year. You could save up your money and make an extra payment each December (or whichever month you choose), telling the mortgage servicer that the extra money should go toward principal. Or you could divide your monthly payment by 12 and send that amount, plus your regular payment, every month, making sure the extra goes toward principal.

Or you could pay a company to debit your checking account every two weeks and automatically make the extra payment for you every 12 months. With most services, you would pay a one-time setup fee of about $200 to $500, plus a service fee of $2.50 to $4.50 for each biweekly payment. Over 22 years, you would end up paying at least $1,600 in fees.

With those fees, why not do it yourself?

"Of course you can do it yourself," says John Kane, president of Mortgage Reduction System Equity Corp., which offers a biweekly payment product called Mortgage Payoff Acceleration Program. "You can do a lot of things yourself. You can sell your own house. You can change your own oil. You can do things yourself that others can do in a more professional, efficient manner."

Not all homeowners have the self-discipline to send in extra payments, "so we provide an automated way to let them do it," Kane says. "The ones who use it are very happy with it."

Payment companies often split the fees with lenders or mortgage brokers. One payment company offers brokers a 20 percent commission on its $288 enrollment fee -- almost $60.

Some brokers shun biweekly payment companies. "Why would I sell something that people don't need?" says Ellen Bitton, president of Park Avenue Mortgage in New York City. She recommends that borrowers just make their monthly payment, plus 10 percent extra toward principal.

Some lenders will let you write one check that includes the regular mortgage payment, plus extra to go toward principal. Other lenders prefer that you write two checks: one for the regular payment and one for the extra. Ask your lender which method to follow.

-- Posted: July 30, 2004




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