Home Mortgage Essentials: Is the Bi-Weekly Mortgage for Real or Just Another Scam?

Have you received an advertisement offering to save you thousands of dollars on your thirty-year mortgage and cut years off your payments? With email "spam" becoming more pervasive as everyone tries to "get rich quick" on the Internet, these ads are popping up with troublesome regularity.

The ads promote the "Bi-Weekly Mortgage" and for the most part, do not come from a mortgage lender. Exclamation points punctuate practically every claim: “No closing costs!”, “No refinancing!”, “No points!”, “No credit check!”, “No appraisal!”     “Save thousands!”, and “Cut years off your mortgage!”

To achieve these wonderful savings all you have to do is allow half of your mortgage payment to be deducted from your checking account every two weeks. It’s easy. Of course, there is a small "set-up fee" and usually a "transaction fee" with every automatic deduction. Essentially, the ads are truthful in almost every respect. They just want to charge you money for something you can do on your own for free.

Normally, you make twelve mortgage payments a year. Since there are fifty-two weeks in a year, a bi-weekly mortgage equals 26 half-payments a year. The equivalent would be making thirteen mortgage payments a year instead of twelve. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments. Indeed, you save money. The ads are true.

This is how it works. Because you cannot simply mail in half a payment every two weeks to your mortgage lender, the bi-weekly mortgage company is an intermediary between you and your mortgage lender. They automatically debit your checking account every two weeks for half of your mortgage payment, then place your funds into a trust account. Basically, this is just a holding account for your money. In another two weeks, there is another automatic deduction from your checking account, and so on. When your mortgage payment is due, your funds are withdrawn from the trust account and forwarded to your mortgage lender. Since you are placing funds into the trust account faster than your mortgage payments are due, you eventually accumulate enough money to make an "extra" payment. The way the cycle works, this occurs once a year. The extra payment is applied directly to your principal balance, which causes your loan to amortize faster, pay off more quickly and save you thousands of dollars.

The potential problems underlying this scheme lie in the trust account. Because your funds are held in the trust account until your mortgage payment is due, there are potential dangers. Not only are your funds held in this account, but so are the funds of everyone else enrolled in the bi-weekly program. That is a lot of money. Most likely, there will be no problems. However, if there are accounting errors, mismanagement, or even fraud, your mortgage payment might not get made. The first hint of a problem will probably be a phone call or letter from your mortgage lender, but not until after your payment is already late. Since responsibility for making the payment rests with you and not the bi-weekly payment company, you may find yourself digging into your personal savings to make the payment directly—even though the bi-weekly payment company has already collected your funds. Later you can work out the trust account problem with your bi-weekly payment company.

To obtain a bi-weekly mortgage, there is usually a set-up fee that runs between $195 and $350, depending on how much sales commission is paid to the individual or company setting up the account for you. You also pay a transaction fee each time there is an automatic deduction from your checking account and sometimes also when the payment is made to your mortgage lender. There may also be a periodic "maintenance fee." Meanwhile, whoever controls the trust account is earning interest on your money.

Therefore, the bi-weekly mortgage plans do not really do anything except move your money around and charge you for it. Plus, even though the danger is negligible, you must trust someone else to hold your money for you. If you can do the very same thing for free, plus save yourself even more money by doing it on your own, why pay someone else? If your goal is principal reduction and saving money, then it is a good plan. If you do it on your own instead of paying someone else to do it for you, then it is a great

Earl Juanico

Florida Mortgage Broker 

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