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
It doesn't make financial sense.
"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
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.