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The Biweekly Mortgage - Who Needs It?

Have you received an advertisement offering to save you thousands of dollars on your thirty-year mortgage and cut years off your payments? With email spam becoming more pervasive as everyone tries to get rich quick on the Internet, these ads are popping up with troublesome regularity.

The ads promote a Biweekly Mortgage and for the most part, do not come from a mortgage lender. Exclamation points punctuate practically every claim:

  • No closing costs!
  • No refinancing!
  • No points!
  • No credit check!
  • No appraisal!
  • Save thousands!
  • Cut years off your mortgage!

To achieve these wonderful savings all you have to do is allow half of your mortgage payment to be deducted from your checking account every two weeks. It’s easy. Of course, there is a small set-up fee and usually a transaction fee with every automatic deduction.

Essentially, the ads are truthful in almost every respect.

They just want to charge you money for something you can do on your own for free.

The Basics:

Normally, you make twelve mortgage payments a year. Since there are fifty-two weeks in a year, a biweekly mortgage equals 26 half-payments a year. The equivalent would be making thirteen mortgage payments a year instead of twelve. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments.

You save money. The ads are true.

How it Actually Works:

You cannot simply mail in half a payment every two weeks to your mortgage lender. Since they do not accept partial payments for legal and accounting reasons, the mortgage company would just mail your half-payment back to you.

Instead, the biweekly mortgage company is an intermediary between you and your mortgage lender. They automatically debit your checking account every two weeks for half of your mortgage payment then place your funds into a trust account. Basically, this is just a holding account for your money. In another two weeks, there is another automatic deduction from your checking account, and so on. When your mortgage payment is due, your funds are withdrawn from the trust account and forwarded to your mortgage lender.

Since you are placing funds into the trust account faster than your mortgage payments are due, you eventually accumulate enough money to make an extra payment. The way the cycle works, this occurs once a year. he extra payment is applied directly to your principal balance, which causes your loan to amortize faster, pay off more quickly and save you thousands of dollars.

Potential Problems with the Trust Account

Because your funds are held in the trust account until your mortgage payment is due, there are potential dangers. Not only are your funds held in this account, but so are the funds of everyone else enrolled in the biweekly program. That is a lot of money.

Most likely, there will be no problems.

However, if there are accounting errors, mismanagement, or even fraud, your mortgage payment might not get made. The first hint of a problem will probably be a phone call or letter from your mortgage lender, but not until after your payment is already late. Since responsibility for making the payment rests with you and not the biweekly payment company, you may find yourself digging into your personal savings to make the payment directly -- even though the biweekly payment company has already collected your funds.

Later you can work out the trust account problem with your biweekly payment company.

The Cost of the Biweekly Mortgage

There is usually a set-up fee that runs between $195 and $350, depending on how much sales commission is paid to the individual or company setting up the account for you. You also pay a transaction fee each time there is an automatic deduction from your checking account and sometimes also when the payment is made to your mortgage lender. There may also be a periodic maintenance fee.

Meanwhile, whoever controls the trust account is earning interest on your money.

Savings of the Biweekly Mortgage

By making principal reductions using the biweekly mortgage program, your mortgage will amortize more quickly, saving you money. How quickly your loan pays off depends on your interest rate and when you begin making the biweekly payments.

On a $100,000 loan at an interest rate of eight percent, your first principal reduction would probably be a year from now. Assuming the principal reduction is equal to one monthly payment ($733.76), you would save $43,852 over the life of the loan and pay it off almost seven years early.

However, you have to deduct from those savings any amounts you paid in set-up, transaction, and maintenance fees.

No-Cost Alternatives to the Biweekly Mortgage

Instead of hiring a company to manage your biweekly payment, you could accomplish essentially the same thing on your own for free. Just take your monthly payment, divide it by twelve, and add that amount to your monthly mortgage payment. Be sure to earmark it as a principal reduction.

The first way you save is that you do not have to pay any fees to anyone. It’s free.

In addition to not paying fees -- using the same example as above -- your total savings on the mortgage would be $45,904. Plus the loan would be paid off three months quicker than with the biweekly mortgage. The reason you save more is because you are making a principal reduction each month, instead of waiting for funds to accumulate so that you can make one principal reduction a year.

Self-Discipline?

The biweekly mortgage companies claim that homeowners are not disciplined enough to follow through with principal reduction plans on their own. They suggest the reason for setting up the biweekly mortgage enforces discipline upon you, and by doing so, they save you money.

However, in this technologically advanced age, banking online and automatic deductions are readily available. You can set up your own automatic deductions including the additional principal reduction and have it go directly to your mortgage lender. Since the deduction occurs automatically, just like with the biweekly mortgages, self-discipline is not a problem. Once again, you don’t have to pay anyone to do it for you and you save even more money.

Conclusion

The biweekly mortgage plans do not really do anything except move your money around and charge you for it. Plus, even though the danger is negligible, you must trust someone else to hold your money for you. If you can do the very same thing for free, plus save yourself even more money by doing it on your own, why pay someone else?

The biweekly mortgage plan - who needs it?

If your goal is principal reduction and saving money, then it is a good plan. If you do it on your own instead of paying someone else to do it for you, then it is a great plan.

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Assist2Sell
Piele Realty LLC

Chris Piele | 720.628.2625
CPiele@WeBuySellColorado.com
2851 S. Parker Rd. Ste PH20
Aurora, CO 80014

Testimonials

We tried to sell our home in Aurora by ourselves to avoid the high commissions that all the realtors were asking for. Frankly the process was very draining on us, trying to do our own marketing, open houses and all the stuff that comes with selling a home. I received a letter from Chris Piele at Assist2Sell and after sitting down with him, we decided to hand the task of selling our home over to him. We chose Chris because of his knowledge of “old school” and current methods of selling homes. And we felt he had the negotiation skills necessary to assure we would get the most money possible out of our home. Chris and his team quickly took care of everything needed to get the home listed and marketed, then within a just couple of days the showings to prospective buyers came in very consistently. He managed to sell our home in just one week and for the price we wanted. And did all that for a flat fee versus the high commissions all the other agents wanted to list our home. Better yet, he found us a buyer who did not have an agent so we did not have to pay a buyer’s agent commission. Frankly, we were THRILLED. If you want to save a ton of money in selling your home, and you want to sell it without a lot of brain damage, then we strongly recommend Chris Piele and his team. David and Marie Galegor
Chris Piele and his Real Estate Team were great to work with.  He helped us purchase a home in Aurora, Colorado.  He and his staff were always professional and very helpful.  I would recommend him when you buy or sell your next home.  It was a very positive experience. I would use Chris Piele for my next real estate transaction. Ronnie and Drake Davis
It was a pleasure to work with Chris in the sale of my mother’s home. He took great care of us. Our situation was unique in that my mother doesn’t own a computer…she doesn’t even have an email address. We received a generous, above asking price offer. Chris literally drove across town to her house to hand deliver the offer, explain everything, and get a signature before the deadline. He saved us thousands of dollars in commissions and provided excellent service. Chris and his staff were prompt, pro-active, professional, and in constant communication with us through the entire process. Renae Powell
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