BI Weekly Mortgages

I am on the radio weekly where I do a 15 minute program. In that program I discuss current mortgage trends, tips, the current interest rate environment and I address different mortgage ideas and questions. Last week someone asked me a question regarding a bi-weekly mortgage and whether it is a good idea. It turns out that this was a topic that a lot of the listeners were interested in and since this is offered to almost everyone who has a mortgage I thought it would be a good topic to discuss today, in the Front Page.

First of all, what is a bi-weekly mortgage? A bi-weekly mortgage is your PITI payment (Principal, Interest, Taxes and Insurance) divided in half and then each ½ payment is paid every 2 weeks.

The theory behind it is that a lot of people get paid on a bi-weekly schedule so it would be easier to divide the mortgage payments to match the paychecks and then a home owner could pay the mortgage payment from that check that came in.

The benefit was/is that since there are 52 weeks in a year, there would be 26 mortgage payment installments, which equals 13 payments a year instead of the normal 12 annual installments. By doing the bi-weekly mortgage, the homeowner would seamlessly pre- pay their mortgage loan and finish a 30 year fixed rate loan in 23 years because all additional payments that are made to a mortgage loan are credited towards the principal and the homeowner would be accelerating their principal payments on this schedule and therefore their mortgage would finish that much quicker.

So now: How much does it cost to set it up? Should a homeowner do the bi-weekly mortgage? What happens if you don’t want to continue the bi-weekly schedule?

Some banks will set up the bi-weekly payment initially. Most banks do not. You close on a normal 12 month annual installment mortgage and then after closing the servicing company whom you will be paying your mortgage payments to will send you an offer to convert your loan to a bi-weekly. There is usually a fee of $300-$400.

I must admit that I am not a great fan of bi-weekly mortgages, at least for every one. While it works for some people very well, it also can really tighten a homeowner’s monthly budget. When people by a home they are sometimes very tight and to make the mortgage payment monthly is not easy. While a bi-weekly sounds good, it is an extra payment. This can cause people to fall into credit card debt or to be constantly slightly short which is very stressful on a family. I believe that the most important thing to healthy family finances is not how long you will be paying your mortgage or even how low your interest rate can be, if you took a 20 or 15 year loan instead of a 30 year loan, but to keep the monthly payments manageable; Even if it means never prepaying your mortgage. When the bank approves you for a mortgage, they aren’t factoring babysitting, dry cleaning,lawn service etc. We have to be even more careful not to put ourselves in situations that are financial recipes for failure from the get go.

If you did start a bi weekly and you find that it isn’t working for you, you can back out of the program, but you have to let your mortgage company know. You can’t just sop paying the bi weekly payment. If you miss a biweekly payment you will have to pay a late charge and it will be reported as a late mortgage payment on your credit report.

I met with a new client on Sunday who want to refinance. They are currently in a bi-weekly mortgage. They asked me not to set it up again be-weekly. He said it was working great for him until he lost his job last year. Now in his new job where he is a school guidance counselor, besides him taking a pay cut, he gets paid 10 months a year, twice a month ( the 15th and 30th of every month), not every other week (bi-weekly). In the summer he gets paid for a summer program in one lump sum for the whole summer. He finds it very difficult to manage his finances with the bi weekly. On the flip side I have another client, buying a luxury townhouse condo along the Hudson River and she said she only wants a bi-weekly!!