BLOG VIEW: For as long as anyone can remember, biweekly mortgages have been a financial oddity – a form of lending that, in theory, actually makes great sense but in too many cases is not allowed and, arguably, costs more than it should.
To see why biweekly mortgages have such an odd niche in the world of real estate finance, we first have to see how they work.
If you borrow $100,000 at 4%, your monthly cost for principal and interest over 30 years will be $477.42. At the end of 30 years (360 months), you will have paid out interest worth $71,868.
With a biweekly loan, you will pay $238.71 every two weeks. The loan will be repaid in 311 months, and the interest cost will be reduced by $11,276.
Why is the biweekly mortgage cheaper? With the 30-year loan, you're making 12 payments of $477.42, or a total of $5,729 per year. The biweekly requires 26 payments of $238.71 for an annual total of $6,206.
A biweekly mortgage program has no magical qualities – it's simply a system whereby the borrower makes larger payments every year and, as a result, pays down the loan more quickly.
If biweekly mortgages really do produce savings, then why are such programs not more common?
One answer is that many mortgage servicers – the companies that collect monthly payments for lenders – have, historically, not wanted to process 26 checks per year. Instead, they will typically accept only one payment per month, or 12 per year. This is because it costs them extra to handle additional payments, and there are more opportunities for mistakes. When Fannie Mae stopped buying biweekly loans in 2009, it explained that it was doing so because there was ‘a lack of demand and increased operational costs.’
A second answer is that the magic isn't in the number of payments – it's in the higher payment totals per year.
‘There's a commonsense mathematical basis for regular and ongoing mortgage prepayment plans, including biweekly mortgages,’ says Rick Sharga, executive vice president at Auction.com. ‘The question is, how do borrowers and lenders get the benefits of such plans without undue cost or complexity?’
Biweekly Dangers
It is possible to set up biweekly mortgage plans with lenders and with third parties that administer such programs. One danger is that the third-party company will collect money from the borrower every two weeks but only make payments to the loan servicer on a monthly basis. To protect themselves, borrowers should check mortgage balances to see that payments are being made to the lender on a biweekly schedule.
The bigger danger is this: What happens if a third-party biweekly payment is late? It's the borrower who faces a late fee and lower credit scores.
How To Get Biweekly Results
There are two basic ways to get the benefits of biweekly mortgages at no cost and with little hassle.
First, using an online mortgage calculator, one can engineer one's own ad hoc, informal, no-cost prepayment program and get the same results that a biweekly plan offers. Lenders today almost universally accept mortgage prepayments. Looking at a mortgage payment coupon, one will see that there's a line that allows one to make extra principal payments.
For example, let's go back to our 30-year loan at 4% interest. Instead of paying $477.42 per month, one could just make 12 payments of $517, and the loan will be paid off in 311 months.
The do-it-yourself approach offers the following advantages when compared with formal biweekly programs offered by non-lender service providers:
- There's no setup fee, which is often several hundred dollars;
- There's no charge per payment; and
- One is not sending money to a third party. One is, instead, sending money directly to the loan servicer, the lender's representative or the lender itself.
Because one is making voluntary prepayments, one can go back to the minimum monthly payment level at any time – there's no obligation to continue making a larger payment if one's income suddenly decreases due to working fewer hours or less overtime.
Second, if one really wants a biweekly payment plan, it can't hurt to ask one's loan servicer. It may offer a direct biweekly program – one that does not involve additional fees or payments to non-lender third parties.
For example, according to Tom Goyda, the vice president of consumer lending communications for Wells Fargo, ‘Many customers prefer to participate in our biweekly or weekly preferred payment program, which may help manage their budgets by allowing them to make automatic payments while building equity in their home faster as they continue to make payments over time. Wells Fargo also offers monthly and semi-monthly options that don't have the potential for extra principal reduction.’
Importantly, Goyda explains that at Wells Fargo, ‘All of the preferred payment program options are offered as a no-cost and convenient way for customers to manage their mortgage.’
With no cost to set up and no fee per payment, the money saved on fees and charges can be used for a greater purpose: the faster pay-off of an outstanding mortgage.
But, why would a lender encourage biweekly payments? By making biweekly payments, the borrower is paying down the loan faster, so the lender has less risk and more dollars that can be loaned out again. All in all, this is not a bad deal for savvy lenders and is, perhaps, an option that will become more common with the growing use of automatic checking account withdrawals to make monthly mortgage payments.
Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Auction.com. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.
(Do you have an opinion to share with MortgageOrb? Get in touch! Send an email to pbarnard@zackin.com.)
