Tuesday, January 18, 2011

Pay Your Mortgage Biweekly and Skip the Extra Fees

Biweekly mortgage payment plans are back in the spotlight. If your not doing this maybe it's time to check it out.

I have noticed ads by Citibank for their "Citibank's Biweekly Advantage Program". It's a convenient mortgage budgeting plan that can help you save thousands of dollars in interest and pay off your mortgage early.

My mortgage is with Bank of America they solicited me through the mail to setup a biweekly mortgage payment plan. Naturally I was shocked that they wanted to be so nice. Just a few years ago it was hard to track down anyone that would even do it. Additionally a large fee was accessed for the privilege. The deal they offered me was that they would automatically draw the biweekly payments from my Bank of America checking account all for no charge.

If you have never heard of bi-weekly mortgage payments, they have been around for decades. They simply got mothballed when consumers were more interested in adding to their debt with home equity loans than paying off their debt faster. 

What they do is simple. They divide your monthly mortgage payment in half and then automatically debit your account for those half payments every other week. Because there are 52 weeks in a year you make 26 half payments which end up as 13 full payments by the end of the year.

Making that one extra payment annually, which feels relatively painless when done through this gradual process, means you payoff your loan faster and save thousands in interest.

Someone who has a $200,000, 30 year mortgage at 5 percent, could pay off the loan five years faster and save $33,000 in interest by paying bi-weekly. Not bad for such a little amount of effort.

What's the drawbacks? Some lenders charge for this service. This is what makes it tough to decide to do it. Citibank requires a $375 upfront charge and takes $1.50 for each transaction. That's 26 transactions per year equaling $39 total per year. If you stay with the program for 25 years you will have paid $1350.

That may sound like a small price to pay for a $33,000 savings, but there is really no reason to pay for these programs. Why not do it yourself? At the end of the year you could just make one extra payment, this will accomplish the same thing. 

Another way to do it for no fees is divide your mortgage payment by 12 and pay that much extra per month. If your mortgage payment is $1200. Divide that by 12 and you would get $100. When you make your mortgage payment every month just increase it $1300, being sure you designate the extra $100 goes to principle.


 The benefit of the informal plan is you can start and stop it at anytime if you need the money. The formal plan keeps you disciplined when you get a little lazy. 

Remember paying of your mortgage early is great, but its foolish to pay extra on your mortgage when  you have credit card debt at a higher interest rate. Take care of the credit cards first.

3 comments:

  1. Great tip to pay off a mortgage early!

    I've played with a payoff calculator (http://www.payoff-calculator.info) to check this and it is really amazing how much you can save on long term by making extra payments.

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  2. It's so simple to just add 1/12 of your mortgage payment to the principle every month. Add more if you can.

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  3. Great tip Dave! As you say, make one extra payment a year and enjoy the benefits!

    Just make sure the amount goes towards the principal and not future interest! You'll be surprised how surprised the banks are that you'd want it applied to the principal and not future interest! :)

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