Biweekly Mortgage Payments Could Be a Bad Idea

Expert Advice on How to Save Thousands of Dollars on Your Repayments

Biweekly Mortgage Payments Could Be a Bad Idea
September 1, 2015

Buy a house or refinance your mortgage and you become instantly popular — with contractors, carpet cleaners and others who want to sell you services for your home. That list also includes companies offering biweekly mortgage payments. These firms promise to save you thousands of dollars in interest, but that is one envelope you definitely want to toss in the “circular file” as junk mail.

That's because you may not save much, you will end up paying unnecessary fees and you can easily set up biweekly mortgage payments for free. There is another reason, too — accelerating your mortgage payoff might be one of the worst things you can do with your money.

A biweekly mortgage payment works like this: instead of sending one payment per month, you send a half payment every two weeks. Since there are 52 weeks in a year and not 48, those 26 payments add up to equal one full monthly mortgage payment extra annually.

Because balances on mortgages are computed only once a month, the payment schedule itself does not save you any money. Pre-paying does cut interest on loans such as credit cards, where your balance is computed daily. With biweekly mortgage payments, however, the entire savings comes from paying down the balance to the value of a thirteenth monthly payment each year.

For years, personal finance experts have criticized the plans as needlessly expensive because you can do this yourself. Either online or on your payment coupon, you can direct any extra payment to be applied to your mortgage principal, and then start paying every other week. That is all there is to it.

What is more, the fees charged by companies that offer these services can seriously erode your savings. In May, the Consumer Finance Protection Board sued one company, Nationwide Biweekly Administration Inc., accusing it of making misleading promises of savings from its “Interest Minimizer” program. The bureau claimed Nationwide collected $49 million in setup fees of as much as $995 a pop and charged $84 to $101 in annual processing fees. Homeowners would have to be in the program a minimum of nine years just to recoup the fees, in one example. Nationwide has denied the charges and disputes the bureau’s findings.

The bigger question is whether pre-paying your mortgage at all is a good idea. With mortgage rates near historic lows, prepaying a loan does not make much of an impact, especially for loans of less than thirty years. You will also be tying up that cash in a very illiquid investment that you can tap only be selling or paying to take out a home equity loan. Moreover, as we have recently seen, homes can lose value, making it impossible to tap that equity.

In addition, prepaying could lower your interest payments to the point where you do not have enough expenses to itemize deductions on your tax return, eliminating your ability to write-off other deductions.

Timing the payoff of your mortgage should be part of your long-term financial plan, not just an impulsive move to cut your interest payments. In general, you will be much better off:

  • taking your extra cash to make sure you have an adequate emergency fund of at least three months' worth of living costs;
  • saving for your big annual expenses;
  • paying off any higher-interest debt; and
  • investing for retirement, especially if you are not fully claiming any employer match in a 401(k) or similar workplace account.

One way you can balance liquidity and pre-paying a mortgage is simply to send one-thirteenth of your monthly payment to a separate savings account. Let that money accumulate all year, where you can earn a bit of interest but, more importantly, where you can access the cash if you need it in an emergency or for some other purpose.


Photo ©iStock.com/Justin Horrocks

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Steffanie | 09.01.15 @ 14:13
We have never gone the bimonthly route to pay on our mortgage. After reading this article, I am quite happy we haven't. We once in a while pay extra on our principle, but that is rare. Great information. Thank you!
Daniel Dohlstrom | 09.01.15 @ 14:15
I chose not to take this payment option and it seems that was the right choice.
Andrea | 09.01.15 @ 14:18
That is interesting. I will remember this if I ever decide to buy a home.
Britt | 09.01.15 @ 14:21
I mean, I can see how it could be a bad thing, especially if you want to have the security of breathing room in savings, but if you have the money to be able to afford such, then I don't see the problem.
Sarah | 09.01.15 @ 14:22
Wow. I never even gave it much thought when we went with the payment method we did. Good to see some info on the choices.
Jackie | 09.01.15 @ 14:33
Great information. It's definitely something to keep in mind when we buy our next home.
Sara | 09.01.15 @ 14:37
Looks like choosing to make one payment a month was the best idea we had. We used to do bi-monthly until we could no longer. Glad we don't now.
Zanna | 09.01.15 @ 14:44
Making a small extra payment directly on the principle might be a better way to reduce your mortgage quickly.
Elaine | 09.01.15 @ 14:44
Wow, never would have know that bit of info without this article. Will have to remember this.
Crystal | 09.01.15 @ 14:47
I once thought this was a good idea and learned the hard way that it's not so. Great information that should be shared!
Irene | 09.01.15 @ 14:58
Good information to have in case we ever purchase a home.
Beverly | 09.01.15 @ 15:10
Always someone out there looking to make a quick buck on something that is free to do yourself. By making that one extra payment a year, or bi-weekly payments, you will cut your 30-year loan down to about 18-20 years. You definitely don't want to make the extra payments if you plan on moving soon or if it's something you can't financially afford to do.
Christina | 09.01.15 @ 15:24
Doesn't sound like it's very beneficial after all. There are better ways to reduce costs and interest.
Kamie | 09.01.15 @ 15:33
I think I need to just put money in a savings account for a home, then when I have more than enough saved up, I will just pay in a lump sum.
Erin | 09.01.15 @ 15:33
I never even knew these companies existed. This is great information to have when considering whether to make extra payments or not.
Nancy | 09.01.15 @ 15:43
Because I bought my house a little later in life, I wanted to have my house paid off sooner than the 30-year time frame. So, I set up with my mortgage lender that I would pay extra each month that went directly towards the principle. It might or might not have saved me money in the long run, but it will accomplish my desire to have my home paid off sooner.
Rindy | 09.01.15 @ 16:09
We have never done this and after reading the article we never will. Our home will be paid off in a few years as it is.
Carla Truett | 09.01.15 @ 16:26
I did not realize that biweekly payments were even an option. I agree that it should be put into savings instead for emergencies.
Victor | 09.01.15 @ 16:37
This is good information to have for people that are new home owners or buying a second home.
Apryl | 09.01.15 @ 16:37
Nope, will stick with once a month, thank you.
Alec | 09.01.15 @ 16:45
My Lovie and I will be looking in to buying a home fairly soon so this article is a big help. I'd definitely be paying as much as I could per month towards the mortgage, but I agree that any extra money should go in savings. It's saddening to think about how much extra people with a bimonthly payment wasted that could have gone towards other bills or the mortgage the correct way!
gracie | 09.01.15 @ 16:54
I have never felt like bi-monthly payments were a good fit for me and this articles certainly did a great job highlighting the reasons that other options may be a better financial fit in the long run!
trish | 09.01.15 @ 17:07
We were highly recommended to go this route by our lender. I mean, they almost force fed it to us. We declined. After reading this, I am still happy with our decision.
Angie | 09.01.15 @ 18:25
I've always wondered why I'd want to pay someone else to do something that I could easily do myself. The information about prepayment not being very advantageous is surprising to me, though.
Christina | 09.01.15 @ 20:30
Thanks for all the information. We are in process of buying a home. I'm glad to have read this first.
Donnie | 09.01.15 @ 20:30
Good to know. Our next house purchase will be easier.
Rychana Vingia | 09.01.15 @ 20:52
I don't like the idea of making biweekly payments. I don't think I would ever go that route.
Wanda Langley | 09.01.15 @ 22:02
Great information for someone getting ready to buy a house or refinance the one they have already.
Heather | 09.01.15 @ 23:23
Very good information for those who were considering it. I've always been told to just save your money and make one monthly payment towards principal only to cut down the length of your mortgage.
mileaway | 09.03.15 @ 16:54
I do it myself. I don't need to pay a company to make my payments. 99% of all lenders allow you to make no penalty prepayments nowadays. Who and why would anyone take out a loan that didn't allow to you to pay it off early unless they like giving their money away!
$commenter.renderDisplayableName() | 12.06.16 @ 18:23
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