Should you make bi-weekly mortgage payments?

Lately I’ve been receiving a lot of calls about offers my clients have received about bi-weekly payments. I wanted to take a minute to set the record straight because banks are charging a fee for this service, and there’s only one reason that you should ever pay the fee….

The pitch to you will look something like this:

1. Bi weekly payment allows you to pay half your mortgage every 2 weeks, rather than paying once a month. This is useful for those who receive paychecks every other week and prefer to budget accordingly.
2. The net effect of the bi-weekly payment is that you pay down your mortgage faster than you would by making your normal monthly installments. 

If you like the sound of #1 enough to justify paying the fee, then go ahead and sign up. If #2 is your motivation and you’re okay making mortgage payments once a month, then DO NOT PAY THIS FEE. You can accomplish EXACTLY the same result doing it on your own.

In a bi-weekly payment situation you simply end up making 13 mortgage payments per year rather than the normal 12. 52 weeks in a year means 26 half payments per year…. 26 half payments equals 13 full payments. It’s as simple as that. Any time you pay over and above your minimum required payment, the result is that you pay the loan back faster than the amortization calls for, and as a result you reduce the effective amount of interest you pay over the life of the loan.

Why consider a portfolio loan?

Some of the best products and pricing are coming from our local, smaller lenders, referred to as “portfolio lenders”. Let’s review the difference between portfolio and conventional loans.

Conventional Loans

Any time you hear interest rates quoted, you’re typically hearing about conventional rates, which are offered by all the big banks. 5/3, US Bank, Union Savings, 3rd Federal, Wells Fargo, BofA, etc. Conventional lending, in layman’s terms, simply refers to mortgage loans that are made by a bank, and then sold on the secondary market, usually to another bank, or Fannie Mae or Freddie Mac.

• The upside of these loans (from a borrower’s perspective) is that they’re typically well priced.
• The downside of conventional lending is that the loans must be underwritten in accordance to the guidelines set by Fannie Mae and Freddie Mac, which are tedious. We’ve all faced delays on closings, and typically they’re because of an obscure underwriting requirement of Fannie/Freddie.
• Another downside of conventional loans is that they’re cost intensive, typically requiring title insurance, endorsements, and heavy lender fees.

Portfolio Loans

Most banks make loans and then sell them, again, considered “conventional lenders” (explained above). Alternatively, if a bank doesn’t sell their loans, they hold them “in house”, on their balance sheets. These loans are referred to as portfolio loans, because they’re held within a bank’s portfolio of assets. Here are the benefits/weaknesses:

• First positive is that portfolio lenders can underwrite according to their own rules. They don’t have to abide by Fannie/Freddie standards, so essentially they can make loans happen that the big banks cannot. If a borrower has a bad credit score, or doesn’t show the income needed to qualify at a conventional lender, portfolio lenders can overlook those deficiencies, as long as the borrower has other compensating factors that make the loan attractive. Words cannot explain how much more flexible, and how much easier these loans are on the borrowers, brokers, and realtors.
• Second positive is that portfolio lenders can price those loans however they want. In a conventional situation, the market dictates rates. But in portfolio situations, the lenders are aware of conventional rates, but can price according to their own appetite, and right now the portfolio lenders are providing some of the most aggressive options on the market.
• The downside of portfolio lending is that most portfolio lenders are hesitant to offer a 30 year fixed. It’s the one product they steer clear of due to the long term liability of the product. However, they have alternatives that are comparable, and in many cases, carry lower rates and lower costs… many times becoming excellent alternatives to a 30 fixed.