Mortgage Blog

I am trying to finish my continue education for loan originators(we have it every year now). And happen to see the following regarding bi-weekly payment options:

Like any other loan repayment plan, biweekly payment programs have drawbacks as well as benefits:

• There is a greater potential for late payments because there are twice as many payments to make.
• The rates for the biweekly loan are often not as competitive as those for standard monthly plans.
• Lenders may charge a fee for administering a biweekly plan.
• When interest rates are low, the biweekly payment plan results in less dramatic savings.

Myth No. 1: Biweekly mortgage payments will improve the consumer’s credit.

Banks often use an automatic bank draft for their biweekly plans. This ensures that all of the borrower’s mortgage payments will be made on time, which will improve the consumer’s credit. However, the same effect can be achieved on a monthly plan by using electronic bill paying or an automatic bank draft.

Myth No. 2: Paying twice a month reduces the mortgage’s compound interest.

Although the borrower is paying every two weeks, in most cases, the loan servicer is paying the loan monthly. A consumer who buys into a biweekly plan is actually loaning the servicer half of his mortgage payment, interest free, for at least two weeks every month.

In addition, the convenience of biweekly payment programs comes at a cost. 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 a borrower elects to pay as he goes, thus avoiding the hefty upfront charge, fees from the same top five servicers range from $4 to $9 a month.

The truly beneficial aspect of biweekly mortgage payments is the two additional half-payments going toward the principal each year. In other words, by making 26 biweekly payments, the borrower is effectively making 13 monthly payments instead of the customary 12. Depending on specific loan terms, one extra payment a year may enable a borrower to pay for his house an average of six to eight years ahead of schedule

A true biweekly mortgage, set up at loan origination or during refinancing, is rare, and is not offered by all lenders; however, it is possible to get many of the benefits of a biweekly payment schedule without the extra costs. Alternatives include:

• paying an additional one-twelfth of the mortgage payment each month, while specifying on the payment stub or coupon that the amount should go toward the principal.
• inquiring about the option of sending a half-payment every two weeks without enrolling in the bank’s biweekly program.
• adding the equivalent of one extra payment to the mortgage, possibly from the proceeds of a bonus or tax refund. The consumer should specify that the additional money is meant to go toward repayment of the principal.
• for borrowers who are paid biweekly, taking half of the amount of the mortgage payment from each paycheck and putting it in a savings account, then using all of the funds in the account to pay the mortgage each month. At least twice a year, the borrower will be including the equivalent of an extra half-payment.