Mortgage Payments Twice a Month - A better plan?

Biweekly mortgage payments may or may not be a good idea

The mortgage industry is a fairly profitable one, and for the last decade has been making tons of money as the housing market has exploded. Still, while profits are good, they are always looking for ways to make more money. One profitable sideline is through the offering of biweekly mortgage payment plans.

These mortgage acceleration plans are set up so that the home buyer pays two payments per month instead of one. Each payment, however, is only half as much. And the payments aren’t really twice a month; they are made every two weeks. So instead of making one $1000 payment monthly, you might make a $500 payment every two weeks. What does this do for you? It allows you to pay off the home about five years sooner than you otherwise might. The reason is that by making a payment every two weeks, you are actually making 13 full payments per year instead of the 12 you would ordinarily make. You are, in effect, making one extra payment every twelve months. Because of the way that the interest is compounded, it adds up over time to a much faster home payoff. That sounds like a good idea. Should you do it?

Perhaps, or perhaps not. Many lending institutions charge for “setting up” this plan. The initial fee may be something between $100 and $500. Most will also charge a modest fee that will be added to every payment, perhaps $10 or so. It’s a simple matter for the bank to set up, so the product is quite profitable for them. Of course, it helps you, too, and the payments will be automatically deducted from your bank account every two weeks, so you won’t have to worry about remembering to make them.

Then again, there is a way to take advantage of this scenario without having to pay at all. You should be free with virtually all mortgages to add extra principal any time you make a payment. If your monthly payment is $1000, there is nothing to prevent you from sending $1100 or $1200 instead. Most mortgage companies provide for this on the coupons you mail in. Some even assume that any extra sum included with the payment is to be added to the principal. By adding even a small sum to your monthly payment, you can accelerate the paying off of your mortgage.

It should be noted that just because you can send extra money, it doesn’t mean that you should send extra money. The money you borrow for the purchase of your house is probably the cheapest money you will ever borrow. It’s certainly cheaper than the money you will borrow from your credit card company if you carry a balance. If your credit card balance is $2000 and you have an interest rate of 20% on the card, you would be much better off sending your extra payment to your credit card company instead of your mortgage company.

Still, it’s nice to know that all you have to do to speed up the payoff of your house is send extra money. You don’t need to enroll in a program or pay a fee to do that.