The Biweekly Mortgage Scam
One of the popular ways to save money on mortgages is to use what is known as the biweekly mortgage payment plan. With the biweekly mortgage payment plan the borrower makes payments on his mortgage every two weeks, instead of once a month. The biweekly payment is one-half of the monthly payment. So, if you converted from a monthly plan to the biweekly plan and you had been paying $2,000 a month for your principal and interest, you would now be paying $1,000 every two weeks.
There is no doubt that this will save you money. By using the biweekly mortgage payment plan, you'll pay off your loan much earlier than you would have if you continued to pay monthly. Typically, a biweekly plan will pay your mortgage, in full, 7 to 10 years earlier, on a 30-year mortgage, than a monthly plan will.
At first glance, it looks like the biweekly plan is magical. In reality, however, there is nothing magical about a biweekly mortgage payment plan. The reason a borrower is able to pay off his mortgage sooner with a biweekly plan, is because he is, actually, making additional principal payments.
In the example above, where a $1,000 payment is made every two weeks, $26,000 is being paid toward the mortgage every year. This is because, quite simply, there are 26 two-week periods in a 52-week year. With the regular $2,000 per month plan, $24,000 is being paid per year.
Now, let's run the numbers on this $2,000 a month mortgage and see what happens when we convert to a biweekly payment plan. With a thirty-year mortgage at 7.5 percent interest, our borrowed amount is $286,035.25. With a borrowed amount of $286,035.25 at an interest rate of 7.5 percent and a $2,000 a month payment, you would save $114,697.00 by converting this mortgage to a biweekly payment plan. This seems astounding! Doesn't it?
Here's what makes it less astounding. Using the same numbers with a monthly plan, except using a monthly payment of $2,166.67 instead of $2,000, the saved amount is $113,682.90. Not a whole lot less astounding than the biweekly plan, is it? Why do we use a monthly payment of $2,166.67 in place of $2,000? As we noted before; when we pay a biweekly mortgage plan, we end up making one extra monthly payment per year.
In our example, $2,000 is the amount of the extra yearly payment. $2,000 divided by 12 means we would be paying $166.67 extra monthly after we converted to a biweekly plan. Paying $166.67 extra each month, at 7.5% with a total borrowed amount of $286,035.25, ends up saving us almost as much with the monthly plan as we would save with the biweekly plan!
The reason the biweekly plan saves a little more than $1,000 more than the "pay a little extra each month" plan is that a $1,000 payment is made two weeks sooner with the biweekly plan. We could save just as much by doing this with our own plan, or, try this: Take the $1,000 first biweekly payment and divide it by 360 payments (30 years). Now take that $2.78 and add it to the $166.67 extra payment and it changes the monthly payment from $2,166.67 to $2,169.45. With this as the monthly payment and all other entries being the same, this plan will save $115,003.69 over the course of the mortgage; or, a little more than the biweekly plan.
You see, the biweekly plan forces the payer to start paying down the interest sooner than a monthly plan because the biweekly plan demands a payment two weeks sooner. To compensate with our own monthly plan, we have to make our first payment two weeks sooner, or split the amount of the first biweekly payment, $1,000 in this case, over the course of 30 years. This makes us pay the same amount into the mortgage in the exact same time as the biweekly plan does.
Here's what's astounding to me! When you convert to a biweekly plan, leading lending institutions charge you between $400 and $1,300 and some lesser-known biweekly conversion companies charge you a monthly fee that can amount to $10,000 and up when totaled! As you've just seen, you don't need to pay these excessive fees because you can get the same effect of a biweekly mortgage plan by simply keeping the mortgage you have and paying a little extra principal each month. Certainly, you can institute this plan without paying any upfront fees!
Also worth noting is; when you commit to a biweekly plan and the extra money becomes too much for you to pay some month, you'll get hit with a late charge for not paying on time. If you institute your own plan, maybe you'll be a little short and not able to pay the extra amount some month, but it won't cost you a $35 to $100 late charge.
So you think my calling biweekly mortgage plans, "a scam", is being a little harsh? I don't think so, in fact, I think they are out and out robbery!