Don’t Waste Your Time and Money on “Bi-Weekly” Mortage Payments
Written by Brian on December 28, 2008 – 9:05 pm -
In October, I purchased my first home. That, of course, means that I started making mortgage payments. Fun!
Within a month or so of obtaining the mortgage, I received something in the mail about biweekly payments. The letter claimed that I could make a payment every other week – automatically debited from my checking account for my convenience – instead of making one monthly payment.
The net result (and the reason I would want to do this) is that I could pay off the mortgage about five years early and save thousands in interest. I looked over the paperwork and was confused. Switching from one payment a month to two payments couldn’t conceivably whittle down the principal that fast, even if it would save me a few pennies on the interest accumulated over half a month.
I was going to call and inquire, but I forgot about it. Then, today, I was browsing the GMAC Mortgage website and I saw a similar advertisement. I checked out the online offer, and I found some fine print to clear up exactly how this program would magically pay my mortgage off sooner.
Biweekly Payments = More Payments
The trick is basically that you end up making an extra mortgage payment over the course of the year.
With the bi-weekly system, you pay half of your normal monthly mortgage payment every other week. That means you’re making half a payment 26 times throughout the year – the equivalent of 13 full payments. In other words, if my old mortgage payment was $1500/month I’m simply paying an extra $1500/year to pay down the principal.
From the GMAC fine print:
One-half of your monthly mortgage payment would be deducted every other week, on the same day of the week, for a total of 26 withdrawals per year. This results in one additional mortgage payment, applied directly to your principal each year, to accelerate the equity growth in your home.
Does this wonderful service come free of charge? Of course not.
I don’t know how much the original offer would have charged, but I did find the costs as advertised through GMAC Mortgage. The program involves a $295 “enrollment fee” and a $5.42 monthly fee (about $65/year).
While these aren’t exorbitant fees by any means, they are entirely unnecessary.
GMAC Mortgage – like virtually every mortgage company on the face of the earth – allows you to add any amount to your monthly payment. Any amount that you include over and above your normal payment (Principal + Interest + Escrow) is used to pay down the principal.
To achieve the same results as the “Biweekly Payments” plan, add a one-time payment equal to your monthly payment to your final mortgage payment for the year. If you have a monthly payment of $1200, not counting any applicable escrow, add $1200 to your December mortgage payment. That amount is based on a $200,000 loan, 30 year term, and 6.00% interest rate.
By adding an annual payment of $1,200 as principal curtailment, you’ll cut short the life of your loan by five years. You can use a mortgage calculator, like this one from bankrate, to play around with the figures. Over the course of those 25 years, you’d be handing $295 + 300 * $5.42 (almost $2,000) to your mortgage company.
It seems silly to pay them for something you can do absolutely free.
Don’t want to make a big payment at the end of the year? Add 1/12th of your monthly payment to each payment. You can split it up how you like, but the bottom line is principal curtailment is the only way to pay off your mortgage early. You don’t need to sign up for a special program and pay any fees to pay down your principal as you go.
These bi-weekly plans (and everything like it) are just another way for the mortgage company to milk you for cash.
Posted in Life of Brian, Musings | 5 Comments »
Tags: Mortgage
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Thank you so much for breaking the bi-weekly process down so anyone can understand it. I will take your advise and pay a payment at end of year and save all those hidden cost. Blessings to you and your family. Thanks again, Ella
I’ve known that’s how biweekly programs work but I signed up for one because I just wasn’t paying the extra on my own. Plus, having half the amount I’m used to, coming out every time I’m paid, is a lot easier to manage financially that adding extra to an already high mortgage payment. I dunno, after talking with friends and trying to do it myself, paying a small amount of money to have it done for me just seems to work better.
Also, in your article you said “If you have a monthly payment of $1200, not counting any applicable escrow, add $1200 to your December mortgage payment” but that won’t save you the 23 years and 25% of interest that these programs advertise. The trick is to make an additional payment INCLUSIVE of the amount that would go to escrow. So if P&I is $1200, but PITI is $1500, to get the same savings you’d have to pay an extra $1500/year, whether you do it annually, monthly, or biweekly. Just thought I’d clear that up.
I stumbled upon a site called Half A Payment (halfapayment.com) they charge a small fee that is not even charged up-front but rather taken from the additional payment. I think I agree with Dawn, I can’t imagine myself putting money aside and sending it once a year, for a 1 time small fee that I won’t even feel i rather just sign up, but before I do any thoughts?
The really “great” thing about GMAC is if you make that bi-weekly payment directly to them through your checking account – they won’t apply the payment to your principle – instead, they apply it to your next payment due. After doing this for 5 years, to I just realized that I don’t owe a payment until next year. And to get it fixed, is a nightmare. NEVER again will I use GMAC mortgage. The person I spoke with didn’t have a good grasp of the english language and kept repeating the same words that appeared on her screen – she had no idea what I was trying, very patiently to her.
I just recently signed up for GMAC’s “Semi-Monthly Mortgage Payment Program,” which directly deducts my mortgage payment twice a month from my checking account. This service does not cost any additional fees. However, despite the fact that GMAC withdraws my funds twice a month (1st & 30th), they only apply the payment once a month (on the 15th), so I don’t benefit from having my payment applied to the balance twice a month, which would dramatically reduce the principle over time by slowing the compounding of interest (saving me money and taking money from GMAC). In addition, the amount that I added to my bi-monthly payment to pay additional principal is not added to the account for yet another month after they receive it! GMAC is clearly screwing its customers by holding their money while the interest on their account compounds, which equates to more fees for them.