The Largely Misunderstood Bi-Weekly Mortgage Prepayment Plan

Bi-Weekly Mortgage Prepayment Plan by Ken Stone
DATE: 04/08/2008

It sounds like magic doesn’t it? Make half your mortgage payment every two weeks and you’ll save serious money on your mortgage by paying it off early.

First, let’s understand what’s actually happening with this type of plan: You’re making 26 half mortgage payments each year – so you’re making one extra monthly payment each year.

Using a simple example, let’s look at the math. If we’re talking about a $200,000 30-year fixed rate mortgage at 6% the monthly principal and interest payment is $1,199.10. By adding $100 in principal reduction to your payment each month, you’ve accomplished the same as the bi-weekly plan (one extra $1200 payment each year). The result is a mortgage that is paid off in 24.5 years. The interest savings in this example is $49,141 – nothing to sneeze at!

Where’s the problem? The answer is both very simple, and very complex.

Problem #1: Companies that administer bi-weekly payment plans charge you money so you can make half your monthly payment every two weeks (by the way, many times they try to get folks in the mortgage industry to sell these programs as a way of increasing revenue). If you’re so inclined to follow through with this approach I recommend you cut out the middle man and add 1/12 of your monthly payment each month to your regularly scheduled mortgage payment. Or even better, send an extra payment in at the end of the year. This way you’ve saved the money throughout the year and it’s available should you have an emergency.

Problem #2: Saving money is not the same as making money. The easiest way to understand this is to look at two families making payments on two $150,000 mortgages. One on a 15-year mortgage, the other on a 30-year mortgage. The family making payments on the 30-year mortgage has an opportunity to pay off their loan in 15 years AND put $25,000 in their pocket. Spending the same exact amount of money each month as the 15-year mortgage family. The best the 15-year mortgage family can do is to pay off their loan. I’ve explained this in greater detail right here.

Problem #3: Paying off principal early will cause your tax adjusted mortgage payment to increase over time. This is the result of paying off the interest prematurely – and because the interest is the only component of the mortgage payment that is tax deductible. By the way: I used to think this line of thinking was “for the birds.” After significant advanced study and certification in wealth and debt management strategies, I now know this detail shouldn’t be ignored. Note problem #2 is in part facilitated by the greater tax benefits of the 30-year mortgage over the 15-year.

Problem #4: Home equity is not liquid or safe. Just ask the unfortunate soul - who for years has paid ahead on their mortgage – if they got a break on their mortgage payments after they lost their job. The answer you’ll hear loud and clear will be “No!” Mortgage payments are due on the first of the month regardless of how much extra you’ve sent in over the years. Wouldn’t it be a bummer to have your home foreclosed on after you voluntarily sent extra money each month or year – to pay off the mortgage early? People that try to accelerate their mortgage would do well to instead invest that money in a super liquid and safe investment account instead (and leave it alone except in the case of urgent emergency!!).

For a more detailed explanation of (#2, #3, and #4) please continue reading about mortgage accelerator mistakes here.

Which takes us back to #1. If you’re so inclined you can certainly start a bi-weekly mortgage payment plan. But be sure you understand exactly what you’re doing. And if you decide to engage in a formal program like this, know that someone is making money collecting your money every two weeks. Unless you don’t have enough discipline to add the extra money each month to a traditional mortgage payment (and you want to pay down your mortgage ahead of schedule) it probably doesn’t make sense to engage in this type of program.

If your goal is to make the best overall financial decision – one that will lead to an optimized result – you might seriously consider alternatives to any sort of traditional mortgage accelerator program. You can learn more about other options for accelerating your mortgage at www.MortgageAcceleratorPrograms.com.