Recs

5

Don't Pay for Bi-Weekly Mortgages

Anyone with a mortgage has seen the letter, and probably several variations of it until you either sign up or the company gets the hint. It's the letter that encourages you to divide your monthly payment and send in money every two weeks instead of every month. The argument is, you'll be making 26 bi-weekly payments, which is the same as making 13 monthly payments. Since you'll be paying one more monthly payment than if you stayed with a 12-month payment plan, you'll pay off your mortgage as much as eight years sooner, saving tens of thousands of dollars in interest.

In principle, this might make sense if paying off your mortgage early is important to you. The problem is, most companies charge for a bi-weekly mortgage plan, generally in one of two ways: (1) an up-front fee of $200 to $400, and then a monthly service charge of $2-$5, or (2) no up-front fee, but pay a monthly fee of as much as $9.

That may not sound like much compared to the thousands of dollars of interest you'll supposedly save, but it's a waste of money. Why? Because you can prepay your mortgage by yourself, for free.

The most common way to replicate the advantages of a bi-weekly mortgage plan is to divide your monthly mortgage payment by 12, and then add that amount to your payment each month (clearly indicating to your lender that the extra money should go toward the principal). If your mortgage payment is $1,000 a month, divide that by 12 -- which results in $83.33 -- and add that to each payment. At the end of the year, you'll have paid the equivalent of another monthly payment (and it'll all be principal, to boot).

Of course, you can send in any amount above your monthly payment to pay off the mortgage sooner. The bigger question, though, is whether prepaying the mortgage is smart. If you're behind in saving for other goals (e.g., retirement, college), then you should stick with a 12-month mortgage and send the money that would have been the 13th payment to a tax-advantaged account.

Remember that mortgage interest is tax-deductible, so if the rate on your mortgage is 6.5% and you're in the 25% tax bracket, the after-tax rate on your mortgage is just 4.875%. It may not make sense to pay off such a low-interest loan when you can, for example, get a tax deduction, tax-deferred growth, and possibly an employer match, by contributing to your 401(k) or 403(b).

For more on getting the most out of your mortgage, visit The Motley Fool Home Center. And if you're behind in your retirement savings, learn about catching up in our IRA Center.


Read/Post Comments (0) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 499276, ~/Articles/ArticleHandler.aspx, 10/20/2014 7:25:22 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Robert Brokamp
TMFBro

Today's Market

updated 2 days ago Sponsored by:
DOW 16,380.41 263.17 1.63%
S&P 500 1,886.76 24.00 1.29%
NASD 4,258.44 41.05 0.97%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Advertisement