Ten years ago when rates were much higher, more frequent payments were more beneficial than they are today. Why? Because the interest ‘component’ relative to the ‘principal’ component was much higher.
We did the necessary calculations and going biweekly on a $200,000 mortgage at 9.0% 5 years, 25 year amortization means you make extra payments over the term of $8,277 saves you $5,308 and reduces the remaining amortization to 14.6 years. The same mortgage at today’s 3.09% saves a mere $426. Amortization is reduced to 17.3 years so you can see that the ‘effect’ is negligible.
It is for this reason that our advice to clients these days is to make monthly payments and also voluntary ‘Prepayments’ twice a year or at year end to accomplish the same thing. Paying down your mortgage faster is always a good thing to do, but remember whether you do it via more frequent payments or by prepayments, you are paying more out of your pocket to generate the additional savings. Most people who make more frequent payments view the mortgage balance and amortization left after the term as pure savings. This is a mistake because only ‘interest’ was saved and any principal reduction was from their out of pocket money.
There is also the danger of going into default faster since any lender can take action based on 3 missed payments, be they weekly, biweekly or monthly. So if you are relying on two incomes to handle shelter costs and one of you loses you job, if you are on biweekly payments, you can literally go into default in 3 short weeks as opposed to 3 months.
We had a client come in last week who had separated with her husband, was on disability due to an on the job injury and was in trouble because she (they) had chosen biweekly payments. The lender issued a notice of default and was preparing for a power of sale action within just one month of missing the first payment. How scary is that. So it’s not worth it is it? She had never missed a mortgage payment in 20 years; the bank was hot helpful or understanding and stopped returning her calls because they had already sent the file to a litigation lawyer to act for them.
If you are concerned about your job stability or your marriage, even if you are not, and you are currently on a frequent payment plan (and you have a good repayment history) you may want to approach your lender to be put on monthly payments.