The concept has been around for decades and still comes up as a frequent question on our website and at workshops: Does it make sense to structure your mortgage payments through a bi-weekly payment program? For those unfamiliar with the concept, a bi-weekly mortgage plan requires a payment every two weeks of half the monthly amount. Since some months have five weeks, you will end up paying the equivalent of an extra full mortgage payment once per year. The math is solid and paying your mortgage this way will cut off seven years of payments!
What Is Even Better Than A Bi-Weekly Mortgage Payment
While paying extra principal on your mortgage is a good thing, a bi-weekly plan may not be the best approach. First, there can be substantial fees involved. I have seen some companies charge as much as $1,500 simply to set up and administer the every two week payment scheme. They usually have additional ongoing fees as well. The second concern I would have is trusting a third party like this to actually make the payment. In my world, the only way I can know a bill has been paid is if I pay it myself.
How To Improve On The Concept Of A Bi-Weekly Mortgage
Even more than just the fees involved or trusting a third party, there is an even bigger reason not to use a bi-weekly mortgage program; you can easily do it on your own. There are two, much simpler alternatives to the bi-weekly mortgage that will give you ostensibly the same results. First, simply make the equivalent of one extra payment each year on the anniversary date of your mortgage and instruct your lender that this money is to be applied to principal. The second option is to make your extra annual payment by adding 1/12th more to each monthly payment (example: your payment is $1,200 so you simply add $100 extra monthly toward principal reduction).
Individuals selling bi-weekly mortgage systems will give you a ton of reasons why these alternatives won't work and why most people won't be disciplined enough to employ them. I don't think it is necessary to go to such mental gymnastics to program yourself to make extra principal payments on your mortgage. Furthermore, why just limit yourself to a one time per year extra payment? If the goal is to pay your mortgage down quickly, perhaps you can throw even more money at it.
Create Your Own Flexible Mortgage Pre-Payment Plan
Depending on the predictability of your monthly cash flow, you may want to determine the exact timeframe you want to use to pay your mortgage off early. You can run the numbers using an online mortgage calculator. Once you know your number, you can simply make your new self imposed higher payment each month, instructing your lender to apply the extra amount toward principal. If, on the other hand, your monthly income varies, you may want to make the decision based on how much extra money you have available in a given month.
When I was in the mortgage business we regularly had clients sign up for thirty year mortgages and then on their own make the higher fifteen year payment monthly. To cut their mortgage term in half, they only needed to bump up their monthly payment by about 20%. The reason they did this rather than just taking the fifteen year mortgage (which would have offered a slightly lower interest rate) was to have the flexibility to just make the thirty year payment if they got into a financial bind. This is an excellent approach that provides maximum flexibility.
Customize Your Own Payoff Date
Maybe you want to pay off your mortgage in twelve years to coincide with your retirement or the date that your first child will be going off to college. You can customize your own mortgage payoff date based on your own needs.
If you have used a bi-weekly mortgage and want to share your experience (agree or disagree), use the comments section below and we can start a conversation. Also, please feel free to share your own mortgage prepayment method.