After you closed on your home loan, did you start receiving mail about bi-weekly mortgage payment services? You know, the services that claim to save you thousands of dollars while shaving years off the life of your loan? Some of these bi-weekly mortgage payment services recently came under scrutiny for deceptive mortgage practices by the Consumer Financial Protection Bureau (CFPB). Here's what you need to know before signing up for a service like this.
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How Bi-Weekly Mortgage Payment Services Work
Most mortgage lenders/servicers don't apply bi-weekly payments received from a borrower; instead, they hold each bi-weekly half-payment and apply it to your monthly mortgage payment once the full amount is submitted. Bi-weekly mortgage payment companies act as an intermediary between you and your lender, allowing a partial payment to be made on a bi-weekly basis.
This allows a homeowner to make 26 payments (of half of their mortgage amount) instead of the traditional 12 monthly payments.
Why You Should Be Wary of These Companies
While paying off your mortgage earlier and saving thousands in interest payments may sound economically savvy, you should beware of practices that advertise:
- Achieved savings without increasing your payment. While technically you aren't increasing your mortgage payment, you are spending more. You'll pay for processing and initiation fees with a bi-weekly mortgage payment company and essentially you'll be paying the equivalent of an extra mortgage payment each year.
- Immediate savings. According to the CFPB, some bi-weekly services advertised immediate savings. In actuality, their median consumer would have had to stay enrolled in their bi-weekly payment program for nine years to recoup their set up fees.
- Unclear costs. Yes, these programs do cost money. Initial start-up fees cost borrowers a substantial amount; sometimes these services keep the first extra bi-weekly payment their clients made (up to $995). A monthly processing fee is charged from there on out.
- Association with your mortgage lender. These bi-weekly payment services are third parties that have no affiliation with your mortgage lender.
How to Pay Down Your Mortgage at No Cost
Instead of paying a separate party to handle your monthly mortgage payment, there are several other ways to pay down your mortgage effectively and at no extra cost.
- Increase your monthly payment – if your goal is to add one additional mortgage each year, divide your monthly payment by 12 and tack that onto your normal monthly payment.
- Pay an extra payment once a year – if you get an annual bonus or generally receive a sizable tax refund, this approach might be right for you by allowing you to make a one-time additional principal payment.
Additional payments can be a good route for many homeowners but there are substantial benefits to carrying a mortgage. Talk to your accountant or mortgage banker about what route is best for your financial picture.
For more information about home financing, in general, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers.