Don’t Pay For A Bi-Weekly Mortgage Plan

My boss recently bought a house, so quite a few of our work related conversations over the past couple of months have shifted away from work and discussing the various stages of home ownership.

One recent conversation brought to light that it’s probably worth reminding people that it’s generally not a good idea to pay to enroll in the bi-weekly mortgage plan.

Me: How’s everything with the move going?
Boss: Pretty good.  Hey, look at this.  We just closed last week but I already got something from the mortgage company.  They offered this bi-weekly mortgage plan for $295.  It shortens the mortgage time by seven years.
Me: Yeah, I get those all the time.
Boss: I was just doing the math and it looks like all they’re doing is making twenty-six “half” deductions instead of twelve “full” deductions.  That basically means that they’re just taking an extra payment a year, right?
Me: You got it.
Boss (getting excited now): So can’t I just add extra to my payment each month and accomplish the same thing?
Me: Yep.
Boss: So, why would anybody pay $295 for this?
Me: Because a lot of people see the savings, figure a $295 investment is worth it, but don’t realize that they can accomplish the same thing without paying a dime for it.
Boss: Sneaky.
Me: It sure is!

My boss and many others have figured out on their own that paying for the bi-weekly plan is simply not worth it.  If you want to do the same thing, all you have to do is:

  1. Identify what your monthly payment is for principal and interest only.  This means that if part of your payment consists of an ‘escrow’ amount to cover such things as property taxes, insurance or association fees, you should exclude this.
  2. Divide the amount above by twelve.
  3. Add this payment amount to your monthly payment.  If possible, make sure you specify this as an extra payment towards principal.  Also, make sure that you don’t have a pre-payment penalty (most standard mortgages don’t).
  4. Enjoy the shorter mortgage pay-off time AND the $295 you saved by not letting the bank do this for you.

Your monthly mortgage payment is $1500 broken down by:
Principal and interest: $1200
Escrow (taxes / insurance): $300

You only want to concentrate on the principal and interest, so your focus is on the $1200.

Divide that by twelve and you end up with $100. That’s going to be your ‘extra’ payment per month.

Contact the bank (or logon to your account if your bank lets you) and add $100 per month to your payment, specifying it to go towards principal.

Your payment will now be $1600 per month:
Principal and interest: $1200
Extra principal payment: $100
Escrow (taxes / insurance): $300

We aren’t doing this at the moment because we’re redirecting any extra money we have towards other things like paying down student loan debt and saving for some home renovations, but should this be a priority, this will be the formula we’ll follow!

6 thoughts on “Don’t Pay For A Bi-Weekly Mortgage Plan”

  1. Good stuff! Could you accomplish the same thing by paying 1/2 payments 2x a month….setting it up through your bank? Or is that when they charge you…when you want to do 2 payments a month? I don't understand what the additional $295 is for? I'm going to be closing on my first home soon and I fully plan on making at least 1 additional payment per year and may increase that as other things are freed up.

  2. Well, either way you need to make the equivilent of an extra payment. However you do that is up to you. I personally wouldn't try to split up any payments simply because each payment event you add also adds risk of something happening for one reason or another and costing you in fees or something else.

  3. I currently do this with my mortgage. However, I choose to make one lump sum payment equal to one months worth of my mortgage around tax time when I receive my refund. It takes discipline, but I know that is what the money is ear marked for so I don't give myself the opportunity to go on a shopping spree.

  4. That is a total rip off. Plus, when you manage the extra amount yourself, you have the flexibility to adjust your payment either up or down without going through paperwork.

    I often wondered, why would you ever apply extra money toward interest? I always have to check the 'principal' box when paying extra. Of course it is to principal, why else would I be giving up more money?

  5. I didn't realize some lenders actually CHARGE for the bi-weekly plan (as you noted, you can do it yourself)! We add extra each month, but could easily do an annual lump sum payment.

    Just be sure that you won't be penalized for these "prepayments" — sometimes it's written into the mortgage. Luckily, there is no penalty for us, and we'll save money in the end.

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