Bill Zimmerman's Weekly Tip - To Bi-Weekly or not to Bi-Weekly, THAT is the Question!

In my view, some of the best financial life-skills tips are free. Today I've got one of those for you that will not only benefit you personally, but also can be used as a 'gem of wisdom' to share with your clients and prospects.

I'm sure at some time since you took out the most recent mortgage on your home, most of you have probably received an "invitation" from your bank or lender to participate in a bi-weekly payment program. The idea behind doing bi-weekly payments is not new and is, in actuality, not a bad way to help you pay off your mortgage early and reduce the amount of interest you ultimately pay the bank by thousands of dollars.

Basically, you're using the calendar to your advantage. Instead of paying monthly (12 payment per year), you'd pay every other week. Because there are 52 weeks in a year, you'd make half your normal monthly payment 26 times. That means you really make 13 full payments instead of the 12 you'd normally make just making your payment on a monthly basis.

For example, a $150,000 30-yr. fixed mortgage at 4.75% on a bi-weekly payment program (essentially paying one extra payment per year) would save the homeowner about $23,000 over the life of the loan AND knock 5 years off the total term. Not a bad way to use the calendar to your advantage! Of course, the benefits are even greater at higher interest rates and higher mortgage balances.

As with every good thing, banks are there to exploit it... As I see it, the two basic problems with bank bi-weekly payment offers are 1) they usually charge a 'set-up' fee of $200-400 (for doing what, exactly?!?!)and 2) you're locked into a rigid payment program where roughly half your monthly mortgage payment is deducted every two weeks from your checking account. That may not work so well for some who's checking balances vary wildly throughout any given month.

The advantage that banks always tout is that a bi-weekly payment program with automatic checking withdrawal helps with "forced financial discipline" which, granted, there are certainly many people out there who could certainly benefit from a little forced discipline...

But, there IS another solution that both addresses the financial discipline problem and is FREE! But before I divulge, it's important to understand that 99% of the bank-sponsored bi-weekly payment plans DO NOT apply the mid-month payment toward the mortgage until the full month's payments are received. So, you're really not getting any benefit paying every other week, anyway! The benefit comes in paying an extra payment's worth per year.

Here are two ways to do-it-yourself for free: 1) you can either just take your current payment, divide it by 12, and add that small extra amount as extra principal payment to your monthly mortgage payment or, 2) if you're afraid you'll forget or lack the self-discipline over time, simply set up a special savings account for this purpose at your favorite bank and direct your bank to send your extra payment amount directly to your mortgage company as a principal-only payment on a specific day of the month. Be sure to check with your mortgage company on their procedures for sending and applying extra principal payments so you do it right for their system.

That's my tip for today. I hope you found it useful. As you share it with prospective buyers it will help you stand out as an expert and someone who really does care to help them succeed as a homeowner.

Your Partner in Greater Success,

Bill Zimmerman