Is it a common practice for bi-weekly mortgage setups not to have points available to pay down?

Question

I'm refinancing my mortgage and I wanted to set it up as bi-weekly, since it effectively applies the extra payment every year. However, as we're going through the process, my mortgage consultant said that the interest rate was limited to the locked-in value we'd negotiated due to it being bi-weekly, and that I could pay points only if I set it up as monthly. Is this a common practice?

If it comes down to needing to switch to monthly, then I'll be sure that I can still apply extra payments and that I won't be penalized for early repayment. Thanks in advance.

Answer 1

Do you want to pay points? The biweekly required payment on a mortgage that is paid off in N years is not half the required monthly payment on a mortgage that is paid off in N years. If you want to "get" the "extra monthly payment" each year so that you can pay off the mortgage sooner, change your biweekly payment to be half the monthly required payment. Note that most lenders are happy to set up an automatic deduction of the required payment from your checking account, but many (most? all?) would balk at doing automatic deductions of more than the required payment amount. Remember that in most cases these days, residential mortgages (even those from your neighborhood bank) are sold to some service company that collects the payments, and so it is not the friendly neighborhood bank where one walks in on the first of the month to make the mortgage payment in person. So, it is harder to pay an additional amount every two weeks (or every month) than it used to be in the good old days; you have to deal with the service company which has little interest in what you want to do. Whether you can still arrange to make mortgage payments in the amounts of your own choosing by initiating a payment (instead of letting the service company generate an ACH request to deduct the required amount from your bank account) is a matter for your bank to decide; wire transfers are expensive and "pay bills" services from the bank are notoriously unreliable as to when the check reaches the recipient, and the recipient might be even more unreliable as to whether the money will be credited to the proper account. The last time I dealt with such a service, the additional amount was simply held as a partial prepayment of the next payment due.

Answer 2

Not an answer. No idea why there's the point issue.

On bi-weekly mortgages - as you note, there's no magic to the math. Take a 30 year mortgage, and make a 13th payment each year (right? A bi-weekly has the payment every 2 weeks, so 26 payments a year, i.e. 13th payment in total over the year) and the result will be nearly identical. What the lender likes about this is the fact that they usually charge the interest rate the 30 year term offers even though the mortgage will run 22-23 years.

You also lose any flexibility the 30 year gave you. I know people paid bi-weekly, and they talk about the 2 extra paychecks as money from heaven. Their monthly budget accounts for 2 checks a month, and this extra money can be used to pay off a bill (24% credit card) or just go to one's emergency fund. OTOH, I know people paid twice a month who were sold on the idea of the bi-weekly mortgage and a few months in, were sorry they did this. I was paid bi-weekly for decades, and it flipped to semimonthly. Would that mess up your budget if this happened to you?

Keep in mind, if you pay an extra 1/12 (8.33%) each month on your 30 year mortgage, you will see the same benefit. If having that 3% debt bothers you, pay even more extra each month. But, if and when rates go back to 'normal', you may find that putting the extra money in CDs yields a better return.

(Note: There is a slight effect for the fact that more frequent payments are made. 1/2 the payment is an average 1/2 month early. Say the payment is $1000/mo. $500 is 6 accumulated months early. So, at 4%, this effect result in about $10 over the course of the year. I offer this because years ago, after I published a "bi-weekly" analysis, and concluded that "all of the benefit was the result of an effective 13th payment", I was set straight, there's the savings that would occur even if a bank accepted 1/2 payment twice per month. About $10/year in this example. But not zero.)

Answer 3

In Michigan, prepayment penalties beyond 3 years after origination are illegal. (Please note, this is not legal advice and I am not a laywer.) As such, your mortgage documents should include either no prepayment fees or limited to those in the first three years and limited to 1% of those prepayments.

Please check your mortgage agreement carefully for this information; it should be clearly present in that agreement, but lenders do vary on this and some may attempt to charge an illegal fee (especially national lenders who may consider themselves bound by US law not MI law, even though MI's position is that they are bound by both).

I would suggest taking the monthly mortgage, and then paying off extra (either simply adding some extra to each payment, or adding an extra payment periodically) on your own, as in Create Your Own Biweekly Mortgage. Just make sure you check your mortgage agreement to ensure they don't attempt to add a prepayment fee.