Guest Post: by Jim McKee (Co-founder of ManageYourMortgage.com)
Biweekly payment plans* for installment loans in the U.S. have been offered to borrowers for a number of reasons, some of which are quite beneficial for the borrower. For example, for people who get paid biweekly, it may make budgeting more convenient. However, when we talk about biweekly payment plans, we are usually talking about also making extra payments on the principal of the loan. These plans are often referred to as “accelerated biweekly plans”, because they are a popular method for Paying off a Mortgage Early.
* Editor’s Note: If you are using the Home Mortgage Calculator, you can choose “Acc Biweekly” in the payment frequency field to simulate an “Accelerated Biweekly Payment Plan”. In most other calculators, “biweekly” simply refers to compounding and/or payment frequency, and has nothing to do with making extra payments. Make sure you understand the difference. – Jon Wittwer
Nearly all biweekly programs offered to borrowers are “simulated” biweekly payment programs, because the majority of lenders cannot accept more than one payment per month. This is due to the fact that their legacy billing systems will generate a new bill after a payment is made and bill late fees for any amount less than a full payment. For this reason, third party service companies have taken on the role of debiting a borrower’s account every two weeks, escrowing the funds and making a monthly payment to the lender with a notation that any excess funds be credited to principal only.
For a biweekly service plan to work for a borrower, the borrower must be in a secure enough financial position to make 13 full loan payments a year instead of the required 12. These programs may be difficult for a person on a fixed income. The borrower will have one and a half times his normal monthly payment amount debited from his account twice a year and this could place a strain on many budgets. When evaluating biweekly service providers, you need to know that when the extra debited amounts are taken that they will be credited to their loan for that month. Some biweekly providers have held on to these funds until the end of the year to earn interest for their own account, instead of helping their clients reduce their interest expense.
Why Might You Want to Use a Service Provider?
One of the major concerns for someone evaluating a biweekly payment service is: Why do I even need a service provider at all? The simple answer is that very few people actually stick to an extra payment plan if they try to do it on their own. I would encourage all interested parties to see if they can manage paying extra on their loans themselves, and if they are not successful, try a service provider.
Using a service provider relieves the borrower of this burden. The service provider will automatically withdraw the extra payments, similar to that of a forced savings plan as a payroll deduction. Other benefits include: electronic payment of the loan, no checks to write, no USPS losing payments, no postal rate increases.
Evaluating Potential Service Providers
Enrollment Fee: Paying an enrollment fee for a biweekly service is not necessary. Most mortgage lenders offer a biweekly service plan that requires a payment of $295-495 as a set-up charge. This is unnecessary since there are quality providers that do not charge an enrollment fee.
Transaction Fees: The biweekly service providers make their money by charging a transaction fee ranging from $3.50-5.00 per debit. Shopping for a plan with a lower transaction fee makes sense. These fees can add up to over $100+ a year, but if you can save hundreds of thousands of dollars in interest and pay your loan off in 21.5 years instead of 30 years, that may not be such a bad deal.
Hidden Fees: In addition to the transaction fees and possible enrollment fee, you should check to see if there may be other “hidden” fees. For example, are there fees charged for changing your plan? Are there fees for not having enough funds in your account when a debit is scheduled?
Customer Service: Customer service is important when evaluating providers. Can you access your account on-line, make changes to your schedule yourself, or will you have to contact a call center?
Biweekly service plans are not for everyone and before you sign up for one, try paying some extra principal yourself. If your budget doesn’t allow you to make regular extra payments, you may find that saving money in a savings or money market account and then paying a lump-sum extra payment a couple times a year works for you. If you do not have the discipline to do this yourself, do some research and choose a provider who will offer you the best service at the lowest cost.
– Jim McKee