September 4th, 2015 3:03 PM by Eric Fang
Like any other loan repayment plan, biweekly payment programs have drawbacks as well as benefits:
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: