Biweekly Mortgage Payment Plan: BiSaver vs. Do It Yourself
Most homeowners know that they have the option to pay more than their required monthly mortgage note, which will directly reduce the principal. Assuming there is no prepayment penalty, due to the power of compound interest (backwards?) this can significantly shorten your loan period. Whether or not this is a mathematically and/or behaviorally optimal idea is a subject of debate, which I won’t go into here.
Anyhow, one of the more popular ways to do this is the “biweekly payment plan”. Imagine you had a 30-year mortgage with a payment of $1,200 per month. If you paid $600 every 2 weeks instead, you would be done with the mortgage about five years early! (Use this calculator for more exact numbers.) Because there are 52 weeks in a year and not 48 (12×4), you are essentially making one extra mortgage payment per year.
The attraction of the biweekly plan is that it often coincides with your biweekly paycheck and thus you don’t “feel” that you’re paying extra.
BiSaver®
Today I got an letter from my bank lender about a program called BiSaver, which is basically an automated bi-weekly payment system. Every two weeks the increased biweekly amount is taken from my bank account, and it is eventually paid towards my loan.
However, it costs $399 upfront, plus $1.50 each transfer ($39 annually)*. Another sneaky way they make money is off of the float. Say your loan is due on the 31st of the month. Earlier in the month, on say the 1st and 15th those two biweekly payments (ex. $750 x 2) will be taken out of your bank account. But according to the fine print, only on the 31st will the amount be paid toward your mortgage. In the meantime, BiSaver is earning interest off of those payments.
I really hated this part of their sales pitch:
Can I pay biweekly without BiSaver®?
No. We are not aware of any mortgage company that will accept biweekly or semimonthly payments for a monthly mortgage. What you may do is submit more than your regular monthly payment each month to reduce your principal balance faster and save interest.
No? If you don’t credit the actual payment until the end of the month, then you’re not saving me anything anyways! In fact, I’m losing the opportunity to earn interest in my own savings account.
Yes, You CAN Do It Yourself For Free
After some research, I found out that “BiSaver” is simply a third-party company that goes around pitching this system to mortgage holders like it is some sort of secret sauce. But really they just accept the payments, and then forward them on to the lender. While it purports to “pay for itself in interest savings” almost instantly, it also neglects to mention that anyone can do this for free. If anything, I’d be paying for the convenience factor. But first ask your bank about one of these options.
Lender-Initiated Automatic Transfers. Right now, my mortgage payment is due on the 15th and the amount is automatically sucked out of my checking account every 10th. This is a system offered by my lender. So I called them up and asked if I could add an additional principal payment to each monthly transfer. The said I could, and it would be free! This confirms my theory that BiSaver pays lenders to market to their customers this fake package, and gives them some sort of kickback. Why not just tell us about the free option??
To replicate the results of the BiSaver program, simply take your monthly mortgage payment and divide it by 12. Now add that to your monthly payment amount. So if you originally paid $1,200 you would add $100 for a total of $1,300 per month.
Use Online Billpay. Now, if your lender doesn’t allow this, then you should still be able to make extra principal payments by check. Now simply use your bank’s online billpay system and have them send a monthly recurring payment for $100 (using this example) to your lender. To force a paper check, you should simply set up the payee as a “custom payee” and supply the mailing address. You should also be able to designate what to write on the memo line of the check. Again, ask your lender for specifics, but something like “principal reduction” or “apply towards principal only” and also your loan account number should ensure that it does not get confused with your regular payment or escrow account.
Use Savings Accounts. The most simple way to think about this is that you need to make an extra payment per year. Every Jan 1st, just write an extra check for $1,200. If you like automation, just setup recurring withdrawals with an online savings account - they all offer this feature. If you use ING Direct, open up a new subaccount.
* Note: $399 + $39 per year, growing at a rate of 5% annually (not 8% to account for inflation) comes to $3,306 at the end of 25 years. Don’t pay for a biweekly payment system when you can do it for free!
Find more in Real Estate | 9/4/08, 6:17am | Trackback
September 4th, 2008 at 6:41 am
“We are not aware of any mortgage company that will accept biweekly or semimonthly payments for a monthly mortgage.”
Countrywide will, albeit for a $4 per payment fee. Aren’t they the nation’s biggest mortgage lender? Sounds like these people have their heads deliberately in the sand, or else they are actively defrauding people.
September 4th, 2008 at 6:46 am
Bank of America offers a biweekly pay option and for its normal retail customers it too charges a setup fee + small transaction fee for each payment. However, if you are a BoA premiere customer they will set this up for you for free, no setup charge, no transaction fees. Based on my mortgage size, and rate, the biweekly option will knock 7 years off my 30yr mortgage. I will have the home paid off in 22 years 7 months.
September 4th, 2008 at 6:52 am
I almost jumped into this when I first purchased my home. Like you I did the math, realized I wasn’t really saving anything. Did some research and discovered they weren’t really doing much either except taking my money. At that point I concluded I could be disciplined enough to make my own extra payments. Just adding $100 in additional principle each month on my mortgage reduces the time by 6 years and actually saves 30k more than the bi weekly mortgage company proposed they could save me.
September 4th, 2008 at 6:59 am
Bank of America offers a biweekly pay option and for its normal retail customers it too charges a setup fee + small transaction fee for each payment. However, if you are a BoA premiere customer they will set this up for you for free, no setup charge, no transaction fees. Based on my mortgage size, and rate, the biweekly option will knock 7 years off my 30yr mortgage. I will have the home paid off in 22 years 7 months.
They accumulate the payments into an escrow account and every 60 months there is a principal reduction equivalent to 50% of a full monthly payment.
My only complaint with this is that Quicken 2008 does not handle bi-weekly mortgage payments very well. Also BoA had to provide a new printed amortization schedule. Trying to track it properly in Quicken is a royal pain and requires some creative transaction juggling. I set up a “placeholder” transaction for the biweekly payments, and allow quicken to post the normal monthly payment. I need to remove the placeholders after the monthly payment is applied in order to have an accurate account balance in my checking account. Then once every 6 months I manually add a principal reduction transaction to reflect the correct mortgage balance. Its a bit kludgey, but I love that I am shaving 7+ yrs off my loan.
September 4th, 2008 at 7:03 am
Wells Fargo offers a bi-weekly payment at no charge, they will automate it and you can increase the amount taken at any time. It is called their Accelerated ownership plan. I set it up so that they would take the money the day after my payday. (This is saving me 6yrs 3months and ~$95K in interest)
My second mortgage is with Principal bank. I was originally told that I could do this as well on my own then later another customer service person told me that they are not set up to take bi-weekly payments. I went to my billpay and just set up a an automatic payment for every 4 weeks. Which will also coinside with the day after a paycheck comes in.
Almost all of this personal finance stuff is new to me, but I am learning and have found that there are ways to work around almost any issue a company presents to their customer.
September 4th, 2008 at 7:09 am
the math says that if you make half your payment on the 1st of the month, and half on the 15th of the month, you should be ahead of someone who only pays on the 1st because of the compounding aspect.
I ended up having long talks with my bank (wells fargo) about this. It doesnt seem like its possible there. Does anyone know if any bank offers a semi-monthly payments schedule where they apply payments as they get them — not just hold them until they get both payments
September 4th, 2008 at 7:11 am
Nuri - That’s the problem. Most mortgages will only apply payments once per month. If you pay anything earlier, they just make money off the float themselves until the date comes due.
If one of these programs actually does *credit* biweekly, then it might be worth a small fee for the benefit. I haven’t done the math there.
September 4th, 2008 at 8:14 am
You don’t have to do it automatically, anyway. In those months when you get an extra check, you can just mail in some extra money. You can probably find a form online to do this, or you may have received one in the mail. Be sure to check the box or otherwise explain that this extra money is to go toward the principal or your plan won’t work.
I only get paid once a month, so adding extra each month works best for me.
Do make sure to talk to your lender about the effects of early payment. If they don’t apply your payment until the end of the month, then don’t make your payment until (just before) the end of the month. If, like the lender for my first car, they use the “rule of 72s” (which means basically, your total interest charged is based on the date of your last payment, as if you had been making equal payments each month), then wait until the very end of your loan to pay the extra money.
Even if it turns out there is a penalty for early payment, it can feel good to build up enough savings to be able to pay off the rest of your loan, even if you don’t actually do it.
My biggest motivation when I started was to look at the amortization schedule. It shows you how much is going toward principal and interest each month. At first, very little is going toward principal, but this number increases each month. When I first started, only $30 of my $600 payment was going toward principal. Depressing! But the good news was that by paying an extra $30, I was cutting a month off the end of my schedule. By paying an extra $100, I was able to cut the length of my loan quite drastically. (Nowadays, it’s not so exciting because $371 is going toward principal. Now my debt plummets faster, but extra payments don’t have such a dramatic impact on my date of last payment.)
September 4th, 2008 at 8:34 am
Navy Federal CU offers loans including mortgages that are specifically setup to be due on the 1st and 15th, a time that corresponds to many people’s paychecks. There’s no charge.
I switched my auto loan to be that way, I’ll end up saving about $600 over the 5 year loan.
September 4th, 2008 at 8:43 am
Thanks for the great post. I’m closing on my condo October 3rd (less than one month!!!) and any info I can gather on a mortgage is much appreciated.
I suppose another option would be to open up a separate savings account and transfer money into that savings account and make a separate payment towards the principal. There’s absolutely no reason anybody else should make money off of you with this float garbage.
September 4th, 2008 at 8:55 am
I have a family member who signed up for a similar “biweekly” payment plan for a “small administrative fee,” despite my best efforts to convince them they could do it themselves for free. Perhaps I’ll drop this article in their inbox as further proof!
September 4th, 2008 at 9:19 am
bisaver? is this some sort of program for saving bisexuals from hellfire?
September 4th, 2008 at 10:10 am
sarah — this is a personal finance blog.
bisave refers to bi-weekly mortgage payemnts instead of monthly
September 4th, 2008 at 10:30 am
sarah… nothing can save them. the rest of us have to suffer through having half as many potential mates to pick from… they get hellfire in return. its only fair.
my bank will allow me to transfer from my checking to my mortgage principle at any time. i made a full extra payment in February and it went through on the 15th of the month… my usual payment goes through on the 5th.
September 4th, 2008 at 10:48 am
haha this is funny…..when you have the money to pay off a house, people tell me I am being stupid for doing so…….but then they find ways to pay off the house faster.
September 4th, 2008 at 10:51 am
Well, most of the mortgage company will allow one to submit a lump sum payment to be applied to the principal. Why not just do that at the beginning of the year (since it saves a little interest)? I used to do this with my previous house, but one must be very disciplined in doing that because he/she will really need to set aside funds each year to do that and it’s easily ignored at the last second because of that “special vacation”
September 4th, 2008 at 10:59 am
Did you get a lender that allows for paying mortgage with credit card, so you can redeem a ton of rewards over a lifetime? They do exist.
September 4th, 2008 at 12:19 pm
My local bank offers a biweekly plan AND if you automatically deduct it from your checking account (no float here) they cut another .125 of the interest rate. The only drawback is you have to have the auto pay come from their checking account which pays next to no interest. But as long as I transfer the money (automatically every month) from my ING account, I’m set.
It sounds like your lender is unscrupulous, to put it kindly.
September 4th, 2008 at 12:26 pm
My mortgage payment is one of the few I still prefer to make by snail mail. I am wary of what foul ups might occur if I were using automatic deductions and my lender were to sell my mortgage (I’ve had problems of this sort in the past). I know, online payments should be a no brainer, but my lender — Wells Fargo — actually has the gall to charge an additional fee for the privelege of giving them my money faster. So I just mail in a statement, old fashion like. There is a space on the payment coupon to specify as much extra principal as you wish to add. I use to do so quite often in the early days — $25 to $50 per month. But after refinancing several years back to a much lower rate (8.5% to 5.7%) and having fewer than 15 years left on the mortgage, it doesn’t now seem to have that much impact.
September 4th, 2008 at 1:27 pm
It appears that “bisavers” is trying to get paid for something that anyone could do on their own. I am sure that they have many unsuspecting customers who think they did the right thing by using them and feel good about saving money (NOT)!
September 4th, 2008 at 1:32 pm
I need to end my enrollment with the Bi-Saver people. You just motivated me to add it to my TODO list! I know it was costing me but kept overlooking that piece of the puzzle. Thanks.
September 4th, 2008 at 2:43 pm
Chris in Boston…
Be careful with Bank of America. I signed up for what I thought was bi-monthly payments with them, but it turned out they were just taking the money and putting it in an escrow account until the second payment was taken out, then they paid the mortgage and took the money I would have recieved from interest.
Maybe they have another plan, but the one I did (only for a month) cost me not only interest but saved me nothing in the long run.
September 4th, 2008 at 3:26 pm
I do not think the bi-weekly idea is wise but certainly if you are going to do it don’t pay someone for the privilege of paying bi-weekly. That is just crazy. Just pay without the middleman or costly service fees a bank charges to have there computer make a couple debits a month.
September 4th, 2008 at 4:41 pm
Brett,
Yes you are correct. BoA’s program holds your half payment in an escrow account. They take 1/2 the mortgage payment every other friday. They credit your mortgage account on the due date of the mortgage. However, if you follow the schedule, the escrow account ends up with exactly half a mortgage payment in extra deposits by the 26th 1/2 payment (6 months). At this time the 1/2 payment is credited to your mortgage account as a principal reduction. The net effect is actually better than paying an extra 13th payment at the end of a year as you get principal reduction twice annually with their program.
I am aware that while the money is in escrow they are earning some interest off it for 30 or so days. However, i still reduce my mortgage time by 7 yrs and 3 months, plus save a ton of money on the interest over the 22 yr period.
Normally for retail customers they charge a setup fee of $395 and a transaction fee for each 1/2 payment. As a premiere banking customer they waive all fees, so aside from the lost interest while the money is in escrow (which is tiny $ relatively speaking) the option is actually a decent plan for the long term.
Normally I would not recommend paying down a mortgage early. I prefer to invest my spare cash and build liquid assets rather than non-liquid equity. I do both however by participating in a bi-weekly plan, AND investing my spare cash.
September 4th, 2008 at 5:57 pm
Or you could do this yourself another way. Since bi-weekly is the same as making 13 payments in 1 year, you could just make 1 1/13 payment every month on the due date . You don’ thave to pay anyone a fee, you don’t have to mess with quicken. I wonder how this compares financially to making bi-weekly, does one way save more interest than the other?
September 4th, 2008 at 7:18 pm
In Canada we have a payment option called accelerated weekly, which is monthly payment divided by four and then use this number to pay weekly. Net effect is you make 4 weekly payments (one month) extra per year. In Canada no extra charges to have an accelerated weekly or bi-weekly payment option.
I am currently on a mortgage paid off countdown of 2 years 8 months left having used an accelerated weekly option.
September 4th, 2008 at 7:52 pm
Excellent post on the fine print of such payment plans. It’s sad that such a simple concept has to have a cost.
September 5th, 2008 at 12:54 am
No offence, but the American banking system seems really, really primitive.
I could make a daily payment if I wanted (although that would be strange :)).
I just log into my internet banking account, set up a fortnightly transfer between my accounts (my mortgage is in the list of accounts) and go back to drinking margaritas
I think maybe you guys should lobby for something a little more advanced. If I write 2 cheques a year its amazing and all my bills come with online payment options. Just type in the code numbers and set the payment date (I could skip typing the numbers by using the banks online-bill system, but I choose not to).
Or am I missing something about how this all works?
September 5th, 2008 at 1:19 am
Gotta hand it to that BiSaver marketing… they even resorted to misleading graphs and staggered the traditional mortgage balance behind the BiSaver mortgage balance in order to make it look even bigger.
September 5th, 2008 at 5:10 am
auntie_green… small discrepancy in your math.
1 1/13 x 12 payments = 12 12/13…. which means you are still short of the full 13th payment. You want to make 1 1/12 payment each month, so that over 12 months you make the 13th payment.
i think this is what the post suggested when it said to add the $100 to a $1200 a month payment.
I prefer the idea of paying an extra payment in january of every year - saves you interest all year long.
Another angle - I track my income and expenses in excel, and split my money into pots as it comes in… including setting back 1/2 of my mortgage payment each paycheck… so twice a year I have an extra half payment on my hands when I get the 3 pay month… this is easy money to throw at the mortgage.
September 5th, 2008 at 6:11 am
I have my mortgage with Chase, and I, too, almost signed up for the bi-weekly program. After thinking about it, I decided to just pay extra every month. I just log onto my Chase account online and click on “”extra principle payment”. Since I am transferring from my checking account it takes about 2-3 days for the transfer. I purchased the house 4 years ago and I am on schedule to have it paid off in Dec 2010. I work a second job and all of it goes towards the house. Then, debt free!!!!!!!! I am a Dave Ramsey fan
September 5th, 2008 at 8:08 am
Retirement was near. I used 0% credit card offers to pay off our Mortgage. I always paid off the card before the 0% EXPIRED. Turned 14 years into 2 years. Now we are retired without a mortgage to worry about. Saved a bucket full of interest.
September 5th, 2008 at 8:16 am
[...] for you. It is called BiSaver. However, there are fees attached to the program. Here is what My Money Blog says about this mortgage payment program: After some research, I found out that “BiSaver” is simply a third-party company that goes [...]
September 5th, 2008 at 8:35 am
Chris in Boston: Thanks for the explination…I realize that is how it worked. I’ll have to look into it
ChrisMR: If you make an extra payment each January, you would be able to collect interest throughout the year, but wouldn’t you also be accuring interest on the loan principal, which, if its like mine, is at a higher rate than you can get in a MMA??
September 5th, 2008 at 10:06 am
I paid off my Wells Fargo mortgage in January, 8 years early. I wish I had been informed earlier, but I only started researching it about 3 years ago. I agreed to paperless statements and signed up for the online payment option, linking my BoA checking account as my payment source. I paid whatever I could afford in principal, but never less than $100, and I always paid it in the middle of the month.
What most people don’t seem to realize is that if you make a principal only payment in the middle of the month (or any time before your next payment is due), it lowers the interest you pay on your next payment, so you are not only knocking down your principal, you are paying less interest from the moment you start. Your interest is calculated on your payment date, so if you have lowered your principal ahead of time, your next payments interest will be lower also. Paying extra principal when you make your monthly payment helps, but you can save thousands by paying the extra principal before your regular payment is due.
I didn’t automate my payments, because I was on a mission to pay off my house and how much I paid depended on my circumstances for each particular month. I kept a spread sheet of my payments and interest saved each month, and I still love looking at it. I used an online mortgage calculator that I played with all the time. As long as you are signed up for the online payments, Wells Fargo doesn’t seem to have a limit on the amount of principal only payments you can make. That last month I made about 7 online payments. They required that the last payment be wired on the exact date the last payment was due.
My mortgage interest was 8%, so each time I made an extra principal payment, I felt that I had earned 8% on that money.
September 5th, 2008 at 5:42 pm
Thoughts on doing this rather than just getting a 15 year mortgage? Aside from the obvious that if you get a 30-year and pay extra, you have flexibility to not pay extra ….I remember a recent discussion here about 15 year mortgages and some seemed adamant that 15 year mortgages were the best thing since sliced bread and others felt equally as strongly that you are nuts if you take a 15 year mortgage. But here in this discussion, it seems most think its a good idea to pay extra…(I have a 15 year mortgage, and am happy with it)
Also, kudos to Toni, buying a house in 2004 and paying it off by 2010. Wow
September 5th, 2008 at 6:09 pm
I went for a 20 year mortgage. It’s easier to pay the extra principal if you’re not obligated to pay an extremely high mortgage payment every month.
I’m surprised at the comments that mortgage companies won’t let you pay, or at least apply the additional principal when you send the online payment earlier than your payment date. I had no problem at all getting it applied by the next day, thus lowering my interest for the next month’s payment.
September 5th, 2008 at 9:14 pm
I’m glad my comment was well received : )
Nuri - yeah, I’ve been reading daily for almost two years now.
September 6th, 2008 at 1:48 pm
Great blog!
September 7th, 2008 at 2:15 pm
I remember getting these letters and then making extra principal payments every month instead of biweekly. One thing to consider: How do the mortgage companies calculate monthly payments? Is it based on the total mortgage remaining every month? If yes then this really makes sense.
My friend was recently buying a car and the dealer told him that even though he prepays the principal the interest calculated for that year will need to be paid regardless. Seemed odd to me though
September 7th, 2008 at 6:23 pm
I think it depends on the company and plan you have, which you should know before you sign the mortgage or other finance papers.
My plan with Wells Fargo allowed me to make principal only payments before my monthly payment was due, which lowered my interest on my next payment. They calculated my interest with my principal balance on my payment date.
Read the fine print in whatever finance program you get in to. I think they pretty much can make their own rules.
September 7th, 2008 at 6:48 pm
How abr making the payment at the begning of the month..instead of 2 biweekly..
i.e. if ur monthly payment is due on 31st of a month..instead of 2 biweekly payment in that month…pay the whole payment at the begning of the month..
how will that work..
September 7th, 2008 at 7:58 pm
[...] Biweekly Mortgage Payment Plan: BiSaver vs. Do It Yourself Jonathan says you don’t need anybody’s help to pay your mortgage bill every two weeks. [...]
September 8th, 2008 at 3:32 pm
Coincidentally I wrote about this topic myself just the day before you. I also concluded it wasn’t a good idea based on the fees and since you can simply pay extra principal and reach the same net result for free. I have a mortgage with Citibank and they offer a similar biweekly plan and they charge a $375 setup fee and $1.50 per draft charge.
September 10th, 2008 at 7:58 am
DO NOT PAY FOR A BI-WEEKLY MORTGAGE PAYMENT FEATURE.
As the blog notes, you can do the same for free by just writing a check or making an extra payment along with your regular payment every month. As the blog says, put a memo saying “EXTRA PRINCIPAL PAYMENT”. If you want to duplicate the bi-weekly mortgage results, just pay 1/12 of your monthly payment. It’s that simple. Put it on automatic using your checking account bill pay or the automatic payment feature of your mortgage.
BTW, don’t be scammed by programs that claim to pay your mortgage off in 1/3 to 1/2 the time using magic rocket science algorithms. It’s your extra money that doing the work, not these algorithms.
September 16th, 2008 at 9:52 am
Wouldn’t you make more money if you auto-invest the extra money you would apply to your cheap 5% mortgage in the stock market assuming it will make 8-10%?
September 16th, 2008 at 2:35 pm
For bimonthly payments, you’re not spending any more money.
September 19th, 2008 at 2:28 pm
INGDIRECT Easy Orange offers biweekly payments for free, though this is not your typical mortgage.i.e after the fixed 5 yrs you have to renew.
September 24th, 2008 at 1:13 pm
Barb, 9-5-08, How do you manage to pay off a mortgage using 0% credit cards? With my current mortgage and income, there is no way that I can qualify for credit in the amount of my payoff.
I did the bisaver with my last 20 year mortgage. It would have knocked it down to around 16 years.
I currently have a 30 year mortgage. My plan is to put 1/2 my payment into a savings account every payday(2 weeks) and earn a little interest. I will make my “extra” payment at the end of the year. Or would it be better to pay the extra $100 a month towards principal?
Lots of great info here, thanks!
September 24th, 2008 at 3:47 pm
SunshineGuy:
Instead of earning a little interest, save yourself a lot of interest. Take your monthly mortgage payment and divide that number by 12. Pay that extra amount, along with your regular mortgage payment each month. Don’t forget to make a separate payment for that extra principal and mark it as EXTRA PRINCIPAL. The sooner you pay down the principal, the more interest you save.
October 2nd, 2008 at 6:23 am
[...] No secret here - it’s called a Biweekly mortgage payment. The only catch is to make sure your lender doesn’t charge a fee for the program or any pre-payment penalties. [...]
October 3rd, 2008 at 6:31 am
Thanks JimmyDaGeek, that definitely sounds like a better plan. Thank you, everyone else for your input.
October 3rd, 2008 at 12:13 pm
To sunshine Guy: If I got a 0% balance transfer offer I would apply the max amount to my mortgage. It is important to pay them off before you lose the intro rate. Thus down with my principal and less interest to pay. It made more sense to send the extra money to a 0% account than double up on my mortgage payments. We have great credit and are always getting these pre approved card offers. I pay for everything on credit and pay off each month. I love those reward points. I have 5 cards with $30,000 limits. I even bought our last car on a credit card. GOOD LUCK!
October 21st, 2008 at 1:00 pm
Many people who have these bi-weekly mortgage payments are under the false assumption that they are intact making bi-weekly payments. What actually happens is the bank will collect your 1/4 payment weekly or a 1/2 payment bi-weekly and hold it in your account until a full payment has accumulated and then post it to your mortgage account. This does reduce the term of the loan and the interest payable as you are making 1 extra payment per year. The problem is the bank does not post the funds to your mortgage account until the partial payments equal a full payment. If the bank did post the funds to the loan on a weekly or bi-weekly basis it would further reduce the amount payable saving the consumer more money. The other problem is that the bank does not pay interest on the money they collect from you nor does it offset the interest accumulating on the loan until it is posted. These programs are still better than just making monthly payments however it is a big scam the bank gets your money free of charge for 2 to 4 weeks each month. In Canada and other countries banks offer bi-weekly programs that actually post the funds when they are collected saving the consumer a lot of money. This is not done in the USA. Why should the bank get to keep my money each month without paying me interest? What a scam
October 21st, 2008 at 1:01 pm
Updated
October 22nd, 2008 at 4:45 pm
Make principal only payments, and they will be posted when you make them. Don’t sign up for the bi-weekly thing…just make the extra payments that will lower your principal, thus lowering your interest.
Seems like most people aren’t reading most of the postings. There’s a lot of info there.
October 29th, 2008 at 11:30 am
[...] Plus Why Does A Bi-Weekly Program Help You? Wisebread DIY Mortgage Acceleration My Money Blog Biweekly Mortgage Payment Plan: BiSaver vs. DIY About.com Save Tens of Thousands of Dollars But Avoid the Scams The Simple Dollar Extra Mortgage [...]
November 29th, 2008 at 1:46 pm
Exactly right, those fees are completely useless. Basically banks just try and rip off their customers now. It is very sad. I wish they would offer services and charge reasonable rates and try to help customers but they show over and over they will try and take your money if they can trick you out of it. You have to act as those they are trying to con you at every step. Which might mean they actually try to help you and you don’t believe them but that doesn’t seem very likely.
January 6th, 2009 at 9:37 am
Well, the thing I keep missing here is are we really saving anything by paying extra principal now? The problem is that the extra principal you pay today goes toward the last payment due at the end of the mortgage, i.e. in 15 or 30 years. And an extra monthly payment today will be worth a lot less than that same amount in 15 or 30 years. For example, if you have one dollar today, and inflation decreases the value of your dollar by 2% per year, the value of that dollar would be about 74 cents in 15 years and about 55 cents in 30 years. And your salary is likely to increase during that time period as well. If you save the amount of the extra payment, you can earn interest on the money that otherwise you would not make. Of course the value of your house appreciates, so you earn income in the form of appreciation for each dollar you spent on the house. But your house appreciates whether the dollar is borrowed or your own. I’d rather have appreciation value, plus interest on the saved money, plus decreased real value in mortgage payments, plus the ability to use that saved money for investments (like buying another property) without having to apply for a loan to borrow equity out of the house. Seems like this is just a way for the bank to entice me to pay down the principal and reduce their risk …
January 6th, 2009 at 2:31 pm
YZ Says:
January 6th, 2009 at 9:37 am
Well, the thing I keep missing here is are we really saving anything by paying extra principal now? The problem is that the extra principal you pay today goes toward the last payment due at the end of the mortgage
this is absolutely incorrect. i had a mortgage broker try and persuade me that it was correct, but please dont believe it.
if you pay extra principle now, you will owe less interest on EVERY payment from now until the mortgage is paid off. you cannot simply say that you wont owe the last payment.
January 6th, 2009 at 2:58 pm
Not only will you pay less in interest for every payment from now until the mortgage is paid off, more of your monthly payment will go towards principal and not interest. This has a snowball effect. Of course, banks will try to tell you otherwise as they get more money if you’re paying more interest and less principal.
January 7th, 2009 at 2:03 pm
@YZ,
If you want to understand loan prepayment better, print an amortization chart for a loan, any loan. Choose any 2 adjacent months. The payment for the first month you choose consists of the interest you owe for the outstanding balance plus enough principal to even out the payment. If you prepay the *next* month’s principal , you save all the interest you would have paid that next month and you move yourself forward by one month in the amortization chart. You can create a spreadsheet that will prove this.
The other question you need to answer for yourself is whether prepayment makes sense. As you wrote, your house value changes regardless how much money you pay for it. Supposedly, you can do better to invest your money for the long-term and make mortgage payments. Also, you would have easier access to your invested money, instead of taking out a home equity loan. OTOH, many people like the idea of getting rid of a large debt sooner, rather than later.
April 20th, 2009 at 7:34 am
Don’t get caught in the mess I’ve just found myself in! We’ve been on the bi-weekly plan with Beneficial since we got a loan with them (boy were we stupid in refinancing with them) — We’ve done the automatic payment route and just figured everything to go smoothly. We are about to refinance again, with rates so low, and with a different company through our broker… and what should happen to me this weekend? I get a letter in the mail telling me our account is PAST DUE — yes, our account is past due — HOW can this be, since they make the automatic payments and pull the money straight out of our account twice a month? And no payments have gone unpaid or underfunded! SO, I decided to do a little checking w/ my online statements… They applied our FIRST check in March (3/04) as Additional Principle! We made two payments (as usual) in March, 3/04 and 3/18 — which all should have been applied to our APRIL payment (due April 1). We canceled our automatic payment, as we are doing the refi and don’t need to continue with paying them automatically, because we’ll be paying them off. So now, I have to go get on the phone and argue with this company to change how the 3/4 payment was applied, so that it shows my account as current. APRIL would have been the month for the additional principal payment as I have three checks this month… so I do not understand WHY they applied it to the first payment in March and I’m livid as this could screw up our refi! Beneficial was bought out by another company a few years ago, and now they’ve completely gone under, or at least closed all of their offices and are no longer accepting loan applications. I can see how, with the way they screw their customers!
May 6th, 2009 at 9:10 pm
What an eye-opener! I’m thankful for everyone who takes time to explain! We just bought our first house a year ago, and have added $200 extra principle almost every month. On our $173,000 loan, I learned using a mortgage calculator that if I add $225 extra principle every month, we could pay our house off 10 years sooner!!!!!!!
WOW!!! Wishing everyone all the best!