Who Benefits from Bi-Weekly Payments?

 

I regularly get inquiries from my customers concerning bi-weekly payments. Questions like, "Are they a good way to save money and lower my risk?" Does it give me everything it promises?"

Let me explain what a bi-weekly mortgage is first. It is simply the option for you to pay half your mortgage payment every two weeks. For many people that get paid every two weeks it's a convenient way to match their income with their expenses. In addition, making payments every two weeks results in 26 payments or 13 full payments. The extra payment is placed in the equity in your home and you could eliminate your 30 year mortgage 7 years sooner. The bank will charge a fee to set up the bi-weekly payments and a fee to directly withdraw your payment 26 times a year.

This is a very good product for the bank! The bank earns additional fee income on your loan and reduces their risk on your loan at the same time! By making extra payments on your mortgage the bank is quickly increasing the equity they have locked up to secure your decreasing loan balance which lowers the bank's risk on the loan. You voluntarily pay fees for something that makes the bank more secure. The bank can turn around and lend out the dollars you give them to pay down your loan for additional bank revenue. Less risk and more profit, it's the perfect product for the bank.

Is this a good product for you too? I applaud the goal of saving an extra mortgage payment every year! Do it! But don't save it with your mortgage banker. Send it to your financial planner. Your mortgage banker can't help you if you encounter an unforeseen crisis in the next 20 years. Your mortgage banker won't share any of the returns they get from your extra payments. If you make bi-weekly payments for 10 years and then fall on hard times, your mortgage banker is obligated to foreclose and keeps most or all of the equity you plowed into your house. This option favors the bank!

I do recommend that you save! But choose investments that YOU control, that are more liquid and that pay you a modest rate of return on your money! You can do better than what a bi-weekly mortgage has to offer! If you are interested in personally evaluating your mortgage options, contact Wendy to schedule a mortgage review in our office.

Have a great day!