Bi Weekly Mortgage Plan: Highway Robbery

The bi weekly mortgage plan has devoured countless victims. Everyone has heard it – “Paying your mortgage bi weekly will save you 7 years of mortgage payments”. But do you know why? I would like to elaborate why the bi weekly mortgage plan is flawed, and show you the most effective way to calculate the necessary payment to payoff your mortgage on the best schedule – your schedule. But first, let’s look at some reasons why most bi weekly mortgage plans are flawed:

  1. The balance is only recalculated once a month.
    That’s right, even though you make 2, and sometimes 3 payments in a particular month, you mortgage balance is not reduced until the end of the billing cycle. This means that the mortgage company continues to collect interest on the mortgage balance as of the beginning of the billing cycle, so in effect, the lender gets to float your payment, and collect additional interest on it from other sources, until the end of the billing cycle. It’s like giving the lender a short term, no interest loan. Does that anger you? It should, because this is never disclosed openly to the borrower.
  2. Typically the payment is “drafted” from your account on a schedule.
    This is a pet peeve for me. This guarantees the lender that they will get first priority at your money, regardless of your circumstance. But Jeffry, it’s so much more convenient! Maybe, until you have an emergency, and need money fast, then you are up a creek. I never, under any circumstances, give anyone access to my main checking account. I pay my bills when I am ready to do so, and I suggest you do the same, even though it is slightly more trouble. Use a quality spreadsheet, like my Free Home Budget Spreadsheet, to ensure you get all your bills paid, every month.
  3. Often, the lender charges additional fees to setup the bi weekly mortgage plan.
    As if it is not enough that they get an interest free loan, draft your account automatically, they may have the nerve to charge another fee on top of all of this, to setup a bi weekly mortgage plan. It makes me sick to my stomach.

Ok, ok Jeffry, I see your point. But I still want to pay off my mortgage earlier, without having to come up with any additional money every month. This is the real misconception. Just because you are paying half of the would be monthly payment every bi week, doesn’t mean you are truly paying half the amount. About one month out of every six months, you will be making 3 payments, which is the only way for the bi weekly mortgage plan to show any benefits. So instead of making bi weekly payments, just do the math to make the equivalent monthly payment:

Bi weekly payment X 26 / 12 = equivalent monthly payment

By using this formula, you will be able to have the true fixed monthly payment, and still achieve the desired result – paying off your mortgage 7 years earlier. But if I could go one further – what if you want to payoff your mortgage even faster than that? Good news, I have compiled a spreadsheet that will allow you to compute a necessary monthly payment, based on a bi weekly payment and desired number of years. All you have to do is fill in the Input Section, and presto – you have the required monthly payment necessary to payoff that mortgage on your desired schedule. Here is a quick example:

Bi Weekly Mortgage Plan Converter
   
Input Area
Current Principle Balance Remaining $80,000.00
Interest Rate 6.500%
Desired No of Years to Payoff Remaining Balance 20
Current Bi-Weekly Payment (*PI only) $258.00
   
Automatic Calculation Area
Current Equivalent Monthly Payment (*PI only) Necessary $559.00
New Monthly Payment (*PI only) Necessary $596.46
Monthly Payment Difference $37.46
   
* Principle and Interest  
   

Feel free to leave any comments / questions below. You may download the xls spreadsheet here:

Bi Weekly Mortgage Plan Converter.xls provided by Personal Finance Resources

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A debt management solution does not imply going for the best remortgages in the town. Anything but mortgages should be pursued. True, that a credit card application would take much longer, but in the end it teaches patience, and time management. Another better solution would be lender loans.

2 thoughts on “Bi Weekly Mortgage Plan: Highway Robbery

  1. Pingback: Finance Blog » Blog Archives » Bi Weekly Mortgage Plan: Highway Robbery

  2. HOW DARE YOU … tell the truth. You must have been in my cubicle 229 hrs ago when a co-worker and I were discussing this. Having most people refi to shorten their term should be a crime and MANY refi’s are not needed. And additional small amount is all that is needed, but most will not home owners will not even think of this.

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