July 22, 2024

Mortgages: The Benefits of a Biweekly Mortgage Plan

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.

“I would never pay a bank for that option, because basically a biweekly is sending in one extra payment a year,” Robert B. Walsh, a principal of Lighthouse Financial Advisors in Red Bank, N.J., said of the payment plan.

The 26 every-other-week payments each year are the equivalent of 13 monthly payments, and the extra cash goes to cut your principal, allowing you to pay off the loan earlier. How much earlier depends on your interest rate. If you had a 30-year fixed-rate loan at 7 percent — outrageously high these days — you would pay it off in 23.9 years, and save $33,555 in interest on each $100,000 of principal, assuming you began biweekly payments right after you took out the loan. With the same loan at 4.5 percent, payoff would require 25.7 years and save just $13,619.

Citibank calls its BiWeekly Advantage Plan “a faster way to build your home equity.” The plan charges a $375 enrollment fee, plus $1.50 per draft. Other biweekly plans, including third-party payment services, charge similar amounts. Some lenders, including Wells Fargo and Bank of America, offer biweekly plans free to customers who pay from an account with that bank.

Citibank acknowledges the do-it-yourself advice. “Some homeowners try to make extra principal payments themselves, but most aren’t able to keep a consistent schedule,” the bank says on its Web site.

Nonetheless, technology makes such payments particularly painless. If your lender offers direct payments via an online site, it will let you add extra principal to the payment. Add an amount equal to one-twelfth of your monthly payment, and don’t think of it again.

If you physically mail a check each month, you’ll have to think some, but not a lot. Your payment coupon has a line where you can write in the additional principal amount you are paying.

Asked why Citibank offered biweekly payment plans, Mark Rodgers, a spokesman for Citigroup, said it is “a matter of client preference” and pointed out that some clients do not bank online.

Albert Engel, an executive vice president of Valley National Bank in Wayne, N.J., distinguishes between payment plans, which he calls “synthesized biweekly mortgages,” and the biweekly loans his bank offers. Those loans are amortized biweekly, in contrast with most payment plans, which accelerate payments without changing the underlying monthly accrual schedule.

That is, while you pay each two weeks, nothing is credited to your account until the monthly due date. Valley National’s loans credit those payments every 14 days, for a slightly faster payoff.

At today’s rates, few customers choose biweekly loans, Mr. Engel said. Still, “it remains a standard product for us,” he said. “As rates increase, we expect this program will become much more fashionable.”

Mr. Engel is particularly dismissive of third-party payment plans, saying borrowers are “foolish” to pay a fee. If nothing else, he suggests a low-tech alternative. “Write a check for half the mortgage each two weeks, and put it in a coffee can.” Each month, send two checks from the coffee can. At the end of a year, there will be two extra checks; send those.

“In effect,” he said, “they are doing the same thing a lot of these entities are charging to do.”

Article source: http://feeds.nytimes.com/click.phdo?i=2d87dd907a98870d991ef0e6a4ccc1c8

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