September 3, 2008

Are bi-weekly mortgage payment plans a good deal?

Many mortgage companies offer a bi-weekly payment plan. With a bi-weekly payment plan you make a payment ever 2 weeks that is equal to half of the normal monthly payment. Since there are 52 weeks in the year this means you're making 26 payments. Its equivalent to making 13 monthly payments. So it ends up making 1 month extra payment per year.

Citimortgage says on their website that : "A homeowner with a $100,000 balance, on a 30 year loan at 6% could save $24,138.65 in interest and pay off 5 years; 5 months sooner."

This sounds like a pretty good deal. If you are paid every 2 weeks then you can easily budget to have your mortgage payment coincide with your paychecks. Plus the bi-weekly plan causes you to pay extra which pays off your mortgage faster and save interest.

But theres a catch: The Citimortage site says: " There is a one-time non-refundable enrollment fee of $375 and a transaction fee of $1.50 for each draft." So you're paying fees for the program. In my opinion there's really NO reason at all that this kind of payment plan should cost extra fees.

The extra fees associated with a bi-weekly payment plan aren't worth it and you can get the same benefit by simply making extra principal payments.

Instead of using a bi-weekly plan like this with a fee you can simply just add an additional amount to your normal monthly payment. The bi-weekly plan adds 1 more payment per year. So if you add 1/12th of a payment to each monthly payment then that would equate to the same thing. If you take a $100,000 fixed 30 year loan at 6% then the payments are $600. If you add 1/12th of a payment then thats $50 extra. Paying $50 extra on your payments each month will pay off your loan 5 years and 5 months sooner. So its the exact same benefit of a bi-weekly plan but without fees.

Citimortage even allows you to setup automatic payments and specify an additional principal payment. So they allow you to setup an extra monthly payment without fees. If your mortgage has such an option then use that feature and save yourself the fees. If your mortgage doesn't have such an option then you can get almost the same savings by simply making additional principal payments on your own when you're able to. (send in an extra check once in a while).
Either way if you simply make extra principal payments then you'll save just as much money on interest and you'll avoid the bank fees that they charge for the bi-weekly payments.

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