Bi-Weekly Mortgages: No Fees, No Hassles

If you have a mortgage, your lender or some other outfit may offer you a program that will help you pay it off faster. These pitches are usually for a bi-weekly mortgage "conversion" program. The cost is "only" a one-time, non-refundable fee of $350 or so, plus some service fees. Sounds like a great deal, doesn't it?

But it's not! These are what I call "pseudo" bi-weeklies. You can create your own bi-weekly plan, and save even more. It's simple and flexible. I'll show you how.

THE REAL THING

Before I explain how the pseudos work, let's make sure you know what a "real" bi-weekly mortgage is. Instead of 12 monthly payments, real bi-weeklies require - and credit to your account - one half of a 30-year loan's monthly payment every two weeks. That adds up to 26 half payments a year, the equivalent of 13 monthly payments, not 12.

All of that extra month's mortgage payment gets applied to the loan's outstanding balance, which can take about 8 years off the term of a standard 30-year loan, and in the process, slash 30% off the loan's interest costs.

Assuming the interest rate and closing costs are comparable, a real bi-weekly might make sense, if you know you can afford the extra payment every year, and don't mind giving the bank access to your checking account.

To my mind, there are two problems with real bi-weeklies: They're rarely available, and your lender will automatically deduct those payments every two weeks, depriving you of the float, and of even a day of flex if times get tough. Having your money electronically extracted from your account every two weeks is the only similarity between real bi-weeklies and the pseudos.

PSEUDOO VOODOO

The telltale sign of a pseudo is someone trying to sell you a "conversion" for the mortgage you already have. You'll be "guaranteed" big savings, plus: "No closing fees!" "No reassessments!" and "No points!"

But you'll have to fork over anywhere from $195 on up. And there will be a contract for you to sign, agreeing to the automatic transfer of loan payments from your bank account, to theirs, every two weeks.

Then you'll probably be hit with a service charge ($2.50 or more) every two weeks, for the next 20 years or so. By the time your loan is paid off, that will put another $1,300 or more of your money into the converter's pocket. Of course that's money you could have used to pay off your loan even faster.

Although they electronically transfer funds every two weeks from your bank account, the pseudo bi-weekly profiteers simply send the bank your required mortgage payment once a month, just as you always did. Then once or twice a year, the excess that accumulates from your bi-weekly payments will also be sent in. Guess who gets to work the float?

While pseudo-sellers claim to offer something special, the truth is: Everyone can easily save more without outside help, and without all those fees and charges.

THE WAY TO SAVE MORE

There's no benefit to sending in bi-weekly payments on almost all mortgages, because banks only credit payments once a month. But it's easy to get greater savings than you can get from a pseudo bi-weekly. All you have to do is divide your current monthly mortgage payment by twelve, and send in that amount as a pre-payment with each month's check.

Say your mortgage is $125,000 at 7.75% for 30 years, and your required monthly payment is $896. Divide that $896 monthly payment by twelve, and you get $75. Send in a pre-payment of $75 every month along with your mortgage check, and you'll save more than you would with a pseudo - because you're not paying any fees and your pre-payments are getting to the bank faster!

Important Banker's Secret Tip: If you don't "trust yourself" to continue sending in that $75 pre-payment (or whatever amount would work for you), just ask your lender to automatically withdraw your pre-payment from your checking account once a month.

JUST DO IT!

You can pre-pay on your own. I have faith in you! After all, you write out your mortgage check every month, don't you? It doesn't take a whole lot of discipline to write out a slightly larger check. There's probably even a line on your mortgage coupon for entering your pre-payment amount. What could be easier? The larger the checks you write, and the sooner you start sending them in, the more you'll save.