Paying the Mortgage, Two Weeks at a Time
The New York Times ran a story this weekend about biweekly mortgage plans, where a homeowner submits half a mortgage payment every two weeks.
If you have recently taken a mortgage, you are likely to receive solicitations pushing these plans, from your own lender or a third party. The pitch is that for a few hundred dollars up front, you can painlessly save thousands in the long term on interest, simply by having half your mortgage payment debited from your bank account every two weeks, instead of paying monthly.
For years, financial advisers and consumer advice columnists have offered the same caution about such plans: Don’t pay to participate. You can achieve the same results yourself at no cost.
With our last mortgage, we signed up for a biweekly payment plan through our mortgage holder at no extra cost. Every two weeks, timed to coincide with payday, the mortgage bank would automatically debit half of our mortgage payment. In three-paycheck months, the mortgage bank would debit the same amount, but apply the full amount to principal, rather than split among principal, interest and property tax escrow. It was fantastic because:
- Paying half a mortgage payment every two weeks is a lesser blow to the wallet (and psyche) than a single full mortgage payment at the end of the month;
- We were building up equity much faster;
- It was all was automatic — we didn’t have to think about it.
When we moved recently, we wanted to make sure that our new mortgage holder provided the same kind of service. We found that while our new mortgage holder does offer a biweekly automatic payment service, it does so at a cost, charging both an “enrollment fee” and a per-transaction charge. Rob and I thought this was pretty ridiculous, so we came up with our own payment system through our bank:
- We opened a separate checking account just for the mortgage. Every two weeks, on payday, half the mortgage payment amount is automatically transferred to that mortgage checking account.
- At the end of every month, our bank’s online bill-pay system transfers the full mortgage payment to our mortgage holder.
- On three-paycheck months, I’ll manually make an additional principal payment to our mortgage holder.
With that manual intervention required for the extra payment, it’s not a perfect, hands-free system, but it’s seemed to work well enough so far — certainly, much better than having to pay a ridiculous “enrollment fee” for basically the same service.