Don’t buy into the Bi-Weekly Payment Program.
A decade or two ago, a way of making mortgage payments, called the “Bi Weekly Payment Program” was introduced, and gained popularity. For an annual administrative charge, the program would automatically take every two weeks ½ of your monthly mortgage payment from your bank account. By doing so, you would pay off a 30 year mortgage in 23-24 years, notably reducing interest paid to the bank.
Before going any further, it’s important to know that this is not a bad program – it does as it advertises and saves money. That said, there’s a much easier way to reduce the term of your mortgage 6-7 years, save approximately the same interest, and skip the $100 – $300 yearly administration fee for the bi-weekly program.
By way of background, a Bi Weekly plan actually makes one extra payment ever year due to some simple math:
· A typical mortgage makes one payment per month, or 12 payments a year
· The Bi Weekly Payment Plans make one – ½ payment every two weeks;
· With 52 weeks in a year, that makes 26 – ½ payments during the year
· 26 – ½ payments equals 13 full payments, or one extra payment every year than making one’s mortgage payment every month
The fact that one extra payment is made each year accounts for well over 90% of the benefit (ie shortening the life of the mortgage). Said differently, if one, on their own, makes one extra payment per year, they would obtain almost the identical benefits of the Bi Weekly Program, but save the $100 – $300 administration fee.
All this feeds into a bigger question – specifically whether it’s good or not to make extra payments to your mortgage. The technical answer to this question is relative to what returns you money could earn invested elsewhere. For example, if your interest rate was currently 4%, and you could invest in your uncle’s oil well and earn 20% annually, it would not make much sense to save 4% in interest but skip the opportunity to earn 20% with your Uncle. Conversely, if you were earning 1% in a Certificate of Deposit, making extra payments to your mortgage could make sense.
Courtesy of Paul Nagel- First Home Mortgage 703-201-5147