by Nancy Osborne, COO of ERATE®
Banks started promoting the idea of bi-weekly mortgages in the late 1990's. The concept involves making half a mortgage payment every two weeks rather than only one payment monthly with the end result being an additional mortgage payment accumulates annually that can be applied directly to the loan to reduce the principal balance on the mortgage. This in turn would shave 5 to 8 years off the term of a mortgage, essentially converting a 30 year loan to a 25 or 22 year loan. Soon third party intermediary companies began cropping up claiming they had developed a plan to help you convert your existing mortgage into a bi-weekly or accelerated mortgage payment plan. The strategy of these intermediary companies is to have you pay them to manage the pre-payment of your loan. For a fee, and your signature on their contract agreeing to the automatic transfer of a partial mortgage payment from your account to theirs every two weeks for the next 20+ years, they will assist you in pre-paying your own loan. The problem is that although these companies collect your money from you twice a month, they only send the payment to the lender once, just as you would normally do on your own. Then several times a year any excess funds that have accumulated in the bi-weekly account would be sent to your lender and the intermediary company that helped set up your so-called bi-weekly mortgage payment account would collect and earn interest on your money.Refinance at Today's Low Rates!
It is very difficult to find a lender offering a true bi-weekly mortgage as only a handful of lenders will actually agree to incur the expenses involved in crediting a mortgage account every two weeks and processing 24 annual payments per loan vs. 12. Unless you are able to find such a lender, and if you did you would likely be required to set up automatic payments to be deducted from your account and transferred to that lender directly, these intermediary companies are not performing a tangible service for you which you could not easily do for yourself. Any borrower can accomplish the same savings without paying a third party to assist them in sending their mortgage payment to their lender. If your bank is not one that will accept a bi-weekly payment, as was mentioned earlier, you will not realize a true benefit in making these additional payments. Note if you are able to locate a lender who truly offers bi-weekly mortgages, you will most likely be required to refinance to obtain their bi-weekly loan. Of course refinancing involves paying closing costs and you might be better served applying those funds you would pay at closing directly towards principal to reduce your loan balance rather than refinancing into a bi-weekly mortgage. If you have the discipline to set aside funds equal to an additional mortgage payment per year, you can pay down your mortgage on your own faster and cheaper, all while maintaining control of your own cash. Simply write an additional and separate check to your lender indicating on the check that the funds are to be applied directly to principal. Do not commingle these funds with your normal monthly mortgage payment of both interest and principal. It is best for tracking and mortgage accounting purposes to keep them separate so there is no questions as to the exact amount of annual principal pre-payments that were made annually.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.