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Do you really want to pay your mortgage biweekly?

If you have a mortgage, you may have received an invitation from a bank or mortgage servicing company to make your payments biweekly.

The upside: paying half of your mortgage every two weeks coincides evenly with many paycheck schedules. Plus, buyers can pay off the mortgage six to eight years early.

The downside: many of the programs come with a hefty price tag. If you are interested in paying half of your mortgage every two weeks instead of making one full payment every month, get detailed information on your bank's program, including all the fees and charges.

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More important, with some self-discipline you can get the same results for free.

Myths and advantages
Savvy consumers need to understand what biweekly mortgage programs will and will not do for them. Here are two common misunderstandings:

  • Myth No. 1: Paying your mortgage twice a month gives you better credit.
    Wrong. Banks often use an automatic bank draft for their biweekly plans, which means all your mortgage payments will be made on time -- and that will help your credit. But you can get the same effect on a monthly plan using electronic bill paying or an automatic bank draft.
  • Myth No. 2: Paying twice a month reduces the compound interest on your mortgage.
    Wrong. In fact, even though you are paying biweekly, chances are your loan servicing institution is paying your loan monthly. Which means that if you buy into a biweekly plan, you are actually loaning the servicing company half of your mortgage payment -- interest free -- for at least two weeks every month.

What will chop away at your interest are the two additional half-payments going toward the principal each year. In other words, by making 26 payments of half your mortgage, you are in effect making 13 monthly payments instead of the customary 12.

Depending on the terms of your loan -- and who you ask -- one extra payment a year will enable you to pay for your house an average of six to eight years ahead of schedule.

The price tag
Biweekly payment programs are easy, but the convenience comes at a cost. Many lenders offer two ways to pay: upfront or as you go.

Of the top five mortgage-servicing institutions, four charge enrollment fees that range from $295 to $379. Three also levy additional charges on every transaction. If you want to pay as you go -- without the hefty upfront charge -- fees from the same top five servicers average from $4 to $9 a month.

Is it for you?
If you are wowed by the convenience of having the bank automatically draft a payment that coincides with your biweekly paycheck, don't have much discipline when it comes to money and don't mind the extra fees, then you might want to consider a biweekly payment schedule.

Some questions to ponder:

1. How long are you planning to stay in your house? Granted, any extra money you pay to your mortgage will likely come back as equity when you sell. But if you're looking for a good deal from a biweekly payment plan, you want to be in the house a substantial number of years. "If I were going to stay five or six years, I'd take the money and put it to better use," says Chris Farrell, co-host of the nationally syndicated public radio show Sound Money.

2. How close is retirement? If you'll soon be receiving your retirement money monthly, do you want to spend money setting up a biweekly payment plan?

3. Would an early payoff on your mortgage facilitate other planned financial goals, like sending kids to college, changing careers or early retirement? Or would it make those plans more difficult?

4. Is there a better way to spend this money? "Do you have a Roth IRA?" Farrell says. "Are you making the maximum contribution to your retirement? Something about owning your own home is satisfying. But when you're talking about looking at your home as an investment, look at all the investments you could be making with that money."

Free alternatives to biweekly programs
While hundreds of thousands of mortgage holders have signed up for biweekly payment programs, they represent only a tiny fraction of the overall number of mortgage holders, according to estimates from the top five loan service providers.

A true biweekly mortgage -- one that you set up when you buy your house or when you refinance -- is rare. Not every lender offers them. In any case, remember that it's possible to get many of the same benefits of a biweekly payment schedule for free.

Here's how:

1. Pay an additional one-twelfth of your mortgage each month. Designate on your coupon that the amount should go against the principal.

2. Contact your loan service agent and find out if you may start sending a half-payment every two weeks without enrolling in their biweekly program. Some banks flat out won't allow it. In some cases, the loan agreement prohibits partial payments. Some mortgage servicing companies will permit it -- but you must write out very specific instructions with each check so that they know where and how to apply the money. If your mortgage institution doesn't seem willing to oblige, don't try this option.

3. If you get a bonus or tax refund each year, add the equivalent of one extra payment to your mortgage. Again, tell the bank that the additional money goes toward the principal.

4. If you get paid biweekly, take half of your mortgage payment from each check and put it in a savings account. At the beginning of the month, write your mortgage check from that account. At least twice a year you'll be including the equivalent of an extra half-payment. Specify on the mortgage coupon that the additional money goes against principal.

Dana Dratch is a freelance writer based in Atlanta.

 

-- Posted: Sept. 20, 2001
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