A common misconception about more frequent payments is that they help you pay down your mortgage faster. Bob and Alice brought in their(bank mortgage) amortization schedule. They had been on biweekly payments for 5 years and thought they were paying down their mortgage faster. What they did not know was that the bank put them on biweekly alright, but not biweekly ‘accelerated’. The net result was no different than had they made monthly payments. We see this happen too often, which begs the question. Why would the bank put them on a more frequent, non-accelerated payment that does not help them pay their mortgage down faster?

The only benefit to the customer was the ‘convenience’ of having it tied to their paycheck, but there was no financial benefit at all since the remaining principal balance was virtually the same as a monthly payment mortgage.  That’s no benefit to the customer, but it was a benefit to the bank. Why? Because, payments are only(required) monthly. So by receiving payments sooner, the bank can use the funds for two weeks each month before applying it to the mortgage, thus making extra interest (profit).

What the bank absolutely should have done was put them on biweekly ‘accelerated’ payments (which Bob & Alice did not know to ask about) which would have saved them approximately $5,000. Presumably the bank was able to do this for the duration of the term. We are talking about a huge amount of ‘free’ money at the bank’s disposal to utilize as they wish.

And did you know that default on a mortgage occurs after 3 paymentsbethey 3 weeks, 6 weeks or 3 months. So the bank can foreclose on you much more quickly when you make more frequent payments. Obviously in case of job loss etc., this represents a much higher risk to homeowners and most people do not know this.

Financial Details:

Monthly payments $931.50 x 12 = $11,178/year. Balance at term end  $160,453

Biweekly: Bank divided yearly by 26 = $429.92    Balance at end of term  $160,479

Biweekly Accelerated divide yearly by 24 = $465.75   Balance at end of term $155,497 Savings = $4,982

Remember, we are on your side, we protect you and save you money, and our services are free, OAC.