Bi-weekly Mortgages … What was I thinking?
Have you ever had a situation when you read too much into something, made some assumptions and consequently the wrong decisions? Well we all have! Here is my recent story on this. The Bi-Weekly Mortgage Payment companies
Background: If you had a mortgage you know its compounded and the way compound interest works – is that for the initial years you pay a ton of interest and at the latter part of the period – you pay a ton that goes towards equity. Biweekly payments towards the mortgage can reduce your loans tremendously if you do get biweekly paychecks (and I do) and if you are allowed to split the monthly mortgage payment and apply the payments split twice a month to your account. I even had a good spreadsheet on this to show that this line of thinking is correct.
Situation: A mail comes along with spreadsheets that says that they can do this for me for 150$. Bah! That is nothing since you make that much in savings within a yr (The way I calculated) … even when you factored in the $3 per transaction (every 2 wks) charge. Sound too good to be true? It is!
The RANT: Apparently the biweekly mortgage payment program takes money from you twice a month but gives it to the mortgage company only once a month “holding” your money for a while till its time to pay. So for the same benefit as before – you pay more in transaction costs, initiation costs and also opportunity cost of your money not held with you. Ofcourse the “selling point” for these firms were the 13th month payment that goes towards principal which eventually cuts your mortgage payoff from 30 yrs to a 26 ….
In other words – the biweekly mortgage payment is a payment you make to keep yourself honest and pay someone to take money from you! Especially transaction costs are free these days with online billpay.
The Result: Of course once I realized there was a clear miscommunication in terms of my understanding of biweekly payment and what was communicated to me – I realized I had immediately forfeited my “setup” costs since I had paid for it. But atleast I had saved the $3 per transaction payments bcos that can add up pretty quickly!! Sunk Cost I guess...