I’m frequently asked about bi-weekly payment plans. To have a clear picture of these plans it helps to understand how they work and how they’re applied to the mortgage. Most bi weekly plans don’t actually apply extra principle to the mortgage on a monthly basis. The reason for this is most mortgages today eventually wind up in the secondary market, which means that FNMA or Freddie Mac are the end investors. Their computer systems aren’t set up for true bi-weekly payments.
The bi-weekly payment plans can still be an advantage. Let’s look at how they actually work. Virtually all of the bi-weekly payment programs require auto withdrawal from a checking or savings account. Normally there is a setup charge of $275 to $375 and a charge of approx. $1.75 to $2.00 per withdrawal. The processing company withdraws ½ of the normal payment every two weeks or in some cases ¼ of the payment weekly.
Assuming that you choose the ½ payment every two weeks option, 26 withdrawals will occur during the year. Once per month they pay the normal payment. This is done 12 times and as you can see one full extra payment is still available to be applied to the loan balance. If you escrow for taxes and insurance there will also be 1/12 of the annual escrow available for principle reduction.
The extra payment is applied to the principle, sometimes twice per year, sometimes once per year. This will result in several years being reduced from the term of the loan.
A borrower can accomplish the same thing by setting up a dedicated savings account, having ½ of their payment deposited to the account via payroll deduction and then having auto withdrawal of your payment from that account. At the end of a year an extra payment will have accumulated in the account and the borrower can simply mail it to their mortgage servicer as a principle reduction. This system will allow a borrower to avoid having to pay setup and servicing charges.
Some people prefer having the convenience of everything being set up for them with little effort on their part, others prefer to save the fees and handle it themselves. If you’re considering bi-weekly payment options, we are happy to offer coaching on which may be better for you. Remember, I’m here for you if you’d like assistance.