Do weekly and bi-weekly mortgage payments offer any benefits? If you are actively seeking a mortgage, or have just recently taken one, you will probably be asked either directly or by means of targeted mail whether you want one of these plans. They will likely promise wonderful savings for an upfront payment of a few hundred dollars. Here’s a brief synopsis of how they work, and why you should avoid paying anything for such plans.
Weekly Mortgage Payments
Weekly mortgage payments offer no financial advantages. They are intended to help weekly paid people who find it more convenient to make their payment on payday rather than monthly. Contrary to what many people believe, you do not make any extra payments each year to help you pay your loan quicker.
Some companies will make a small charge, such as $1 per payment, for doing this. In fact, it is purely convenience: you are not paying any extra to your mortgage. Your monthly payment is multiplied by 12 then divided by 52 to give a weekly amount. Your annual payment is exactly the same as making monthly payments – work it out!
Bi-weekly Mortgage Payments
Bi-weekly mortgage payments, on the other hand, do help you repay your mortgage quicker and save thousands on interest. Some companies will charge you a fee of a few hundred dollars for running the plan for you. They are not mortgage lenders, but private companies.
What they do is take half your regular monthly mortgage payment from your bank account and place it into a trust fund every 2 weeks. Once they have two payments, they make your normal monthly payment to your mortgage lender.
At the end of the year they will have two extra payments (26 x 2-weekly periods = 13 monthly payments compared with 12 monthly periods). At the end of the year this extra payment is paid and deducted directly from the balance of the principal sum still owed.
Why pay somebody to do this for you? There are inherent problems with that, because you are paying a third party to make your payments. If they fail to do so for any reason, you will have to make these payments to your mortgage lender yourself!
You can do this yourself in a simple way by adding 1/12 of your normal monthly payment to your regular monthly payment, and explain to the lender that this is for payment to the principal only. Here is how each method works out in one example.
Example mortgage: $175,000 over 30 years at a fixed rate of 4%.
Normal monthly mortgage repayment:
Mortgage cleared in 360 months
Total interest paid: $125,771
360 monthly payments of $835.48
Bi-weekly mortgage payments via third party:
Mortgage cleared in 310 months
Total interest paid: $106,623
Bi-weekly payments = $417.74
Mortgage cleared in 311 months
Total interest paid: $106,289
Monthly payments = $905.10
The mortgage is repaid 49-50 months quicker, and the interest saved is around $19,000. Some might find it easier to make the straight normal bi-weekly payments rather than add on the extra 1/12. However, you should check up on the fees being asked to operate the plan and take these into consideration.
In fact, you can duplicate what the third party does by saving the first of the two payments into a separate bank account and then making the combined monthly payment yourself when it is due, while saving the extra as it accumulates. By the 26th bi-weekly payment you will have enough to make a double payment, and so on into the next year. Alternatively, make your normal monthly payments and add an extra payment at the end of each year.
Whichever way you work it, bi-weekly mortgage payments can save money, but you can also do this yourself at no cost. Weekly mortgage payments, however, save nothing.