I often times get asked by clients about a bi-weekly mortgage payment option. Often times these questions come as a result of a client receiving a solicitation in the mail to sign up for a bi-weekly mortgage payment plan. These plans promise thousands of dollars in savings and on the surface look great.

By paying a mortgage bi-weekly you make a total of 26 half mortgage payments. Those 26 half mortgage payments total 13 full mortgage payments compared to the 12 you would normally make in a calendar year. By paying bi-weekly you made one extra payment per year. By paying that extra payment you manage to reduce your interest cost and pay your loan off faster. Both are great things!

Many of these bi-weekly payment plans appear as though they are coming from us as your lender. We DO NOT solicit you for a bi-weekly payment plan and any communication from us will clearly state it came from us. This should be your first red flag when exploring these programs.

What these bi-weekly payment programs fail to make clear is the fact that they DO NOT apply a payment to your mortgage every two weeks. In the rare event they did send a payment in to your mortgage servicer the payment would not be credited to your account until the second half of your payment was received.

In most cases, the bi-weekly payment plan takes your half a payment out of your account and holds it in their account until they take the second half of your payment. Once they take the second half of your payment they then send in the full amount they collected for the month. There are two months out of the year where they will draft your account for three half payments. In those two months, they will send in to your mortgage servicer what amounts to a payment and a half. That payment and a half reduces your principal balance and is where the savings come from.

Most of these companies charge you a fee to set up the payment plan (even though they are using your money for free). In addition, some even charge you every time they draft your account for each half payment. These charges dilute your savings and are completely avoidable by following my alternative to this plan.

I think prepaying your mortgage is a great idea when it makes sense. Prior to prepaying a mortgage I would prepay credit card, installment or student loan debt. Often times those loans are far more costly and typically don’t care any tax benefits. Additionally, paying those loans off sooner will enhance your cash flow which makes it easier to prepay your mortgage debt at an accelerated pace.

So what is my alternative to these plans? Simple, take your principal and interest portion of your payment (shown on your monthly mortgage statement) and divide that by 12. Pay that much extra per month as part of your payment and you will actually pay off faster than a bi-weekly mortgage plan. Additionally, you can do that for free and at no cost.

I like to tell my children “A fool and his money are easily parted”. Signing up for a bi-weekly payment plan and not understanding the details can easily part you from your hard earned money.