Do Biweekly Mortgage Payment Programs make Sense? 8/19/07
Stewart H. Welch III, CFP, AEP
Founder, The Welch Group, LLC
Do Biweekly Mortgage Payment Programs make Sense?
"Do Biweekly Mortgage Payment Programs Make Sense?"
Recently, I saw someone on TV touting biweekly mortgage payments as a way to pay off your mortgage five to seven years early and save tens of thousands of dollars in interest payments. On the surface this sounds like a great idea, but is it really? Let’s take a closer look.
Remember that money is nothing more than a commodity. If you have an ‘extra’ dollar, you can spend it, invest it, or pay down debt with it. Assuming that you choose not to spend it, you will want to use this commodity to your best financial advantage. In many cases, opting to invest will yield better results for wealth accumulation than would be the case if you paid down debt. This is especially true if you are not fully investing in tax deductible retirement plans such as your 401(k) or IRA. On the other hand, in some instances, paying down debt will yield better results. If this is the case for you, consider which of your debts should receive your attention. If you have debt other than your home mortgage, chances are it is at a higher interest rate and the interest payments are not tax deductible. Therefore, you should first focus on paying off this more expensive debt.
If you determine that setting up a biweekly mortgage plan is the best use of your extra funds, consider the following:
Companies that offer these programs often charge high start-up fees as well as ongoing biweekly service fees. Check with your original mortgage lender or bank first to see if they offer more competitive programs.
Make certain your mortgage loan agreement does not have a prepayment penalty. Most don’t, but you want to be certain before you start pre-paying.
If you would like to pay off your mortgage early and avoid these charges, you can simply make one extra payment per year.
Make sure your mortgage company accurately credits your payments against your account. I recommend that you run an amortization schedule and contact your mortgage company at least once a year to confirm that all payments have been accurately recorded. You can access a mortgage amortization schedule at the
at www.welchgroup.com. Resource Center
If you are determined to pay off your mortgage early, an even better strategy is to set up an investment account and contribute your ‘extra’ mortgage payments into it each month. At the point that your investment account value is equal to your mortgage balance, sell your investments and pay off your mortgage completely. For example, payments on a $500,000 30-year mortgage with 6% interest are approximately $3,000 per month. A biweekly strategy would pay off your mortgage approximately sixty-five months early. If instead, you invested $250 per month in Vanguard Index 500 mutual fund and earned an average of 9%, you would accumulate enough money to pay the tax on your gains and pay off your mortgage 81 months early. Obviously, there are some market risks with this strategy but they’re diminished over the 20-plus year time horizon.
The commercial bi-weekly payment program should be used only if you lack the discipline to do it yourself and are willing to pay added fees to someone else.