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The Myth Of The Bi-Monthly Mortgage

by The Happy Rock on April 5, 2008

First things first, making bi-monthly payments on your mortgage WILL cut your mortgage repayment time down significantly. Using bi-monthly payments on a $200,000 mortgage at 6.0% you will have the mortgage paid off 6 years early and save about $50,000 in interest. What happens is that you are paying 26 bi-monthly payments which is the same as 13 monthly payments. In essence you are paying one more monthly payment a year.

dream-beach-house.jpgIf bi-monthly payments can save you a lot of money, then why do I mention them as a myth? Well, most of the programs that banks offer their lenders are really not good financial tools. Bi-monthly programs are really just budgeting tools that you have to pay extra money for. Most of the programs have a $200-300 enrollment fee and then charge a $2-5 dollar fee each payment. The fees go to pay the company that is handling your payments. That’s right, another company other than your lender holds your first payment and then pays the mortgage company when they receive both monthly payments. That is a lot of money for something that most lenders let you do yourself.

Another myth is that you save money because your first payment of the month gets applied early and cuts the amount of interest you have to pay. This isn’t the case. Almost every mortgage lender still has the same monthly amortization schedule whether pay monthly or bi-monthly.

So is it worth it? Probably not. The same outcome can be accomplished on your own, by either paying one extra monthly payment a year or paying an extra 1/12th payment each month. As long you make sure the extra money is going towards principal, you will achieve the same results. I would rather see people become responsible for their own money, rather then letting another company budget for them. Plus when you are in control you get the advantage of skipping the extra payment if times get tight. It should also be noted that most of us aren’t at the point were we should be considering paying extra on a mortgage. That will come once all your other debt is gone, an emergency fund is in place, and retirement accounts are growing.

Get Rich Slowly reminded us of another interesting way to payoff your mortgage early: pay an extra principal payment each month to get rid of your mortgage in half of the time.

{ 18 comments… read them below or add one }

Pete April 15, 2008 at 11:10 am

Great ideas -now if i can just be disciplined enough to make those extra payments. Our mortgage is our only debt, so that definitely helps, but sometimes I’m conflicted as to whether we should put extra payments towards that, or towards retirement savings.

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The Happy Rock April 15, 2008 at 11:24 am

@Pete – I would go for a funded emergency fund, then retirement and/or college savings, then mortgage as a general order. Once your retirement is on track, then you could add extra to the mortgage. Just my opinion. We are in about the same place as your are to. We are saving mostly for a down payment on a bigger family home rather than the small condo we live in.

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Steve June 9, 2008 at 12:23 am

It is funny how some people can still fall for the old tricks of the banks. They want to charge you extra fees for something that you can just do yourself. If you work out a budget,and cut out wasteful spending, you will have no trouble coming up with 1/12 extra towards your mortgage each month.

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Colin July 28, 2008 at 5:00 am

A few sentences in that sounded like a great idea…

Now I read your post… not so great.

I don’t think we have anything like that in the UK, I will have to check.

Thanks!

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mortgagemonkey August 4, 2008 at 10:31 am

Hi Happy Rock. Was just looking for info on bi-monthly mortgages. Great post and well explained. Thanks for the info.

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Ki September 26, 2008 at 1:30 am

We opted into the bi-monthly mortgage payment on our first house. I think about 6 months later I realized it was pretty much a scam. I guess it doesnt really hurt you in the sense that you do pay off your mortgage quicker but the literature is kind of misleading. It would be better if they sold it as a tool to help you be discplined. Since then on our other mortgages we just make extra payments now and then.

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Maxwell Pierce November 15, 2008 at 8:27 am

Wow, I never knew that The Myth Of The Bi-Monthly Mortgage. That’s pretty interesting…

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Anne Mahrle November 26, 2008 at 12:32 pm

Just got bi-monthly mortgage payment info for a new vacation house we just bought & the savings looked impressive so I thought I’d do my usual internet research to check it out. But, thanks to your info, I’ll nix their propaganda and go with your suggestion to make an extra payment. I already pay an extra $50 monthly on our full time home and am excited by the amount saved. Thanks again!!

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Jon Boyd Ann Arbor real estate Buyer's Agent January 18, 2009 at 11:16 pm

First, I think you mean bi-weekly. As in 26 payments a year. Bi-monthly is actually just 24 payments. (There is some ambiguity to these terms.)

A couple other things:

Since the banks get their money back faster with a bi-monthly mortgage then the rate should be better than a regular monthly mortgage. But as someone who shops and negotiates mortgages professionally I’ve never seen that. They are always at the same or sometimes a higher rate that a standard 30F loan.

Also, in the mortgage market the “deals” are generally better where there is more competition. And there isn’t much competition in the bi-monthly market.

So, in my experience the bi-weekly deals have never been better than what we could find in regular monthly loans. And I wouldn’t recommend using a service to make a loan payment, there is too much of a chance for mistakes.

Thanks for posting this article!

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The Happy Rock January 20, 2009 at 12:04 pm

@All – Glad to help.

@John – Thanks for the biweekly info. After a little research biweekly is probably the right term although it has been used enough that even the dictionary lists the both biweekly and bimonthly as interchangeable. So now neither is really right! I wish that the banks would get more competitive and pass on the savings and less risk, but then they wouldn’t get much interest I suspect.

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Marian Mccanless January 27, 2009 at 2:14 pm

Readers should note that when you make extra payments they need to be specific about the fact that it’s to pay principal. I make out a separate check for the extra payment and write principal reduction in the memo. That way the bank doesn’t apply it to interest.

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The Happy Rock January 27, 2009 at 7:36 pm

@Marian – Great tip. In my experience it seems banks are much more transparent now then they used to be with this.

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Phil March 4, 2009 at 1:01 pm

I am searching for a bi-monthly mortgages definition and found your article. Now I understand the disadvantages of a bi-monthly mortgages. very informative and well explained. Nice post

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Mortgage Calculator Man May 28, 2009 at 4:03 pm

I’m pretty sure bi-monthly means once every 2 months. I believe you mean bi-weekly… Semi-monthly would be closer to every 2 weeks as it would imply twice per month (once every half month). But it’s a common misnomer.

It is a great way to accelerate a mortgage and can save boatloads of money long term even if you do have to pay a 3rd party to take care of the disbursements to the mortgage company for you. But as you mentioned, it’s just as easy to pay a little extra each month and it accomplishes the same end for free…

Nice article.

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Christianpf August 28, 2009 at 11:52 am

This is a good point, if the general population realized how much quicker they could pay their mortgages down by consistently paying extra – we would have a lot more 40-somethings without a mortgage!

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scott May 18, 2010 at 11:54 pm

I think you nailed it by saying they were budgeting tools. Just save the money yourself and make a payment in a lump sum.

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J Kane October 13, 2010 at 11:06 am

In the end, a lot of it comes down to self-discipline. If you can force yourself to pay extra on your mortgage rather than spend it on stuff, you should stick with a monthly payment. That way you reach the same outcome and maintain more financial flexibility.

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ray June 1, 2011 at 4:07 pm

bi-monthly means twice a month in CANADA, i think you mean bi-weekly, bi-monthy MEANS every other month in the states, this is based on DEFINITION and NOT personal interpretation

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