Are Bi-Weekly Mortgages a Good Idea?

This is the second post of our series on getting the best home mortgage

Bi-weekly mortgage advertisements claim to save you lots of money over the life of your loan and help you to pay if off years faster. They do this by the simple routine of paying half of your monthly payment every fortnight, rather than one payment per month. This actually works out to thirteen months instead of twelve and that’s where the savings come in. Of course, you also have to pay a ‘small’ set-up fee and various other sundry fees and charges to the people who will do this for you.

That’s all right if you don’t mind paying out money unnecessarily. Just remember that mortgage lenders don’t actually accept half-payments, so your money is sitting in a holding fund for two weeks of the month - along with a lot of other people’s money - and the company that is doing you such a big favor is making interest off it, as well as the fees that they charge you for that privilege.

So why not do the same thing yourself and keep all those extra fees and charges? Here is an easy way to do it. You can take that extra monthly payment and divide it by twelve, than add one 12th onto each monthly payment. That would pay off that extra month by the end of the year. You do have to earmark that extra sum as a payment off of the capital, not the interest.

Doing it yourself in this way actually works out three months ahead of the way the bi-weekly crew do, because they wait until the end of the year when your extra payments have accrued to the full extra monthly payment. You, on the other hand, have been doing it per month, which brings the capital and thus the interest down more quickly.

Now your bi-weekly mortgage company will claim that the average borrower doesn’t have the self-discipline to make those extra payments. This is a load of - candy. If you have the discipline to write out a big check twelve months per year, you can certainly add that extra bit on. Better still, you can set up automatic payments online so that the money is deducted automatically.

Just as an example, if you take a loan of $100,000 at an interest rate of 8% and make the principal reduction equal to the monthly payments of $733.76, you would be saving $43,852. And you’d be finished seven years earlier. How good is that?