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Bi-Weekly Mortgage

A bi-weekly mortgage is one where the homeowner starts with a 30 year fixed mortgage. The monthly payment is divided in half and this payment is then made every two weeks. Got that? Since there are 52 weeks in a year, this method creates a thirteenth payment each year, and reduces the mortgage term down to about 24-25 years (exact number depends on the interest rate) from 30.

A mortgage holding bank, or third party service provider will offer to handle the logistics of this for you, debiting your checking account every two weeks and arranging for the monthly payment as well as the magic thirteenth payment each year. For this service they will charge as much as $400 set up fee and $6.95 per month.

This may seem trivial, but let's do the math. $400 plus $6.95/month, invested at 6% (the rate I'll assume the mortgage is) and 24 years later, you have nearly $6400. On a $200,000 mortgage at 6%, the 30 yr monthly payment is $1200, and by going to a bi-weekly schedule, the number of years drops to 24.5. The $6400 would be better spent to pay the mortgage down. In other words, do it yourself, and you'd save enough to pay off the final 6 months of the mortgage!

Lets talk for a moment about the reasons I might avoid this approach altogether, not even doing it myself;

  • Are your credit cards all paid in full each month?
  • Are you maximizing your 401(k) (at least capturing the match, if any) and Roth IRA deposits?
  • How is your emergency account funded?
Keep in mind, this money once paid, is no longer available to you. An equity loan may not be easy to get when you need it the most. Also consider that a 15 year mortgage carries a rate as much as 1/2% lower than the 30 year. So if you are using this method, or any other to pre-pay, keep an eye on the current interest rates and think about refinancing into that 15 year term when you can afford to commit to that payment.
I recently heard of other mortgage accelerator programs, 'Money Merge Accounts' among others, which promise some remarkable returns for your remarkably large fee. I'll write about this in a future article, but remember, if it sounds too good to believe, it usually is.
JOE