Monthly Payments on Mortgage and Saving Money by Restructuring Them

Someone told me he was saving lots of money because he switched his mortgage payment schedule to biweekly. He said it was a really great plan and his mortgage would be paid, in full; several years ahead of his monthly payment schedule and it would save him over $70,000!

I told him I thought it was a great deal and then asked him how much it cost to convert to the biweekly plan. He said, "Nothing!" and then proudly stated, "and there is only a $19 charge added on to each payment!" Ouch! I didn't want to go into this more deeply, so, I just smiled, said "so long" and moved on.

Paying to convert to biweekly

Here's the problem. Since I know his house is almost brand new; I figure he has 28 years left on his mortgage. The $19 charge he's paying every month to convert to the biweekly plan is costing him: 26 (payments per year), times 28 (years left to pay), times $19 (per payment). This adds up to a total cost of $13,832 for something he could have done for free!

Most lenders, especially the high profile ones, don't charge $13,000 for a biweekly mortgage conversion. More commonly, there is an upfront charge of anywhere from $800 to $1,300. However, there are companies who actually pay your mortgage every month while collecting payments from you on a biweekly basis.

These are the scoundrels who charge you monthly fees.
These "middleman" type companies charge on the fly, so to speak. Your mortgage never changes hands; the company just handles your mortgage payment distributions. Not only are these companies expensive to deal with, but also the potential for mischief is enormous! I advise staying away from them.

The secret to biweekly payments

In fact, I advise staying away from biweekly mortgage payment plans altogether. It's not that the numbers don't work out to your advantage when you pay biweekly, it's just that you don't need to pay anyone to convert to this plan because you can do one on your own any time you want.

There are 26 two-week periods in a year. So, 26 biweekly payments equal 13 yearly payments. This works out to the same as paying 1 and 1/12th payments each month. Of course, paying this extra fraction of a payment every month, is the real secret to how biweekly plans work.

The plain and simple fact is; if you pay 1/12th of a monthly payment extra every month, you will pay off your mortgage in the same number of payments it would take to pay off the mortgage with the biweekly plan.

A case study

Here's exactly how that would work in the case of a family who has 28 years left on a mortgage when they currently owe exactly $200,000 and the interest rate is 7%.

When converting to a biweekly plan, they would pay $679.61 every 2 weeks. This is exactly one-half the monthly payment they had been paying which is $1,359.22. A biweekly mortgage calculator tells us $679.61 every 2 weeks will have the mortgage paid in 22 years and 6 months. This results in a savings of more than $58,000!

However, since paying $679.61 every 2 weeks is the same as making 1 extra $1,359.22 monthly payment each year, there is another way you could simulate the biweekly plan.

Divide $1,359.22 by 12 and you come up with $113.27. Add this amount to each monthly payment and, as an early payment mortgage calculator will tell you, you also will have the mortgage paid in full in 22 years 6 months and will save more than $58,000.

Conclusion

So, what is the difference between switching to a biweekly payment plan and paying 1/12th of the payment extra each month? Nothing! Except you will not pay any extra fees and you will retain total control over your payments.

So don't be caught off guard if approached by a salesperson who is intent upon converting your mortgage to a biweekly plan. Restructuring the way you make your payments will save you money if you pay more principal upfront. However, converting to a biweekly plan is just a sneaky way to do that. The downside is, it also gets you to pay somebody commissions.