Avoiding The Bi-Weekly Payment Scam

Avoiding The Bi-Weekly Payment Scam
by
Dave Czach

On the surface, the Bi-Weekly Mortgage Reduction Plan seems great. You divide your mortgage payment in half and pay it every two weeks into a large escrow account. The escrow service company then pays your payment every month on your behalf. The amount they pay is equal to your regular payment plus 1/12 of one payment. The extra 1/12 is applied directly towards your principle balance - not interest. Thus, shaving approximately 9.1 years off a 30 year mortgage loan and saving you tens of thousands of dollars in interest.
Now here's the flaws with this system. First, the escrow company usually charges a set up fee in the neighborhood of $200 or more. Second, the escrow company charges you around 2% of your new payment amount every month. Third, you sign a contract to authorize the escrow company to make your loan payments on your behalf. Fourth, your credit rating is now in the hands of strangers. The good news is you can do this on your own without fees or sleepless nights.
There are two methods for do-it-yourself mortgage reduction. First, simply send two checks each month to pay your loan. One check for the full regular amount. One check for 1/12 of your regular payment with the memo section highlighted and stating "Apply directly to principle reduction only."
At the beginning of each quarter, send a certified letter to your lender requesting your account balance history over the past three months. Double-check to see if your 1/12 payment was applied directly to your principle. If not, send a certified letter to the manager with copies of your checks to settle the dispute.
The second method of self mortgage reduction is the mysterious 13th payment. Establish a separate savings account to be used only for your mortgage reduction program. Each month deposit 1/12 of your regular monthly mortgage payment in the account - use payroll deduction if necessary. At the end of the year, you have accumulated the 13th payment (1/12 payment per month x 12 months). In December, you send two checks to your mortgage company. One for the regular payment and one for the 13th payment. Be sure to write and highlight the memo section on your 13th payment check with "Apply directly to principle reduction only." Again follow-up with a certified letter within 3 months to verify the 13th payment went straight to principle, not interest.
In conclusion, the Bi-Weekly Mortgage Reduction Plan is great and makes sense. However, since most lenders do not accept bi-weekly payments, clever entrepreneurs created the massive bi-weekly escrow system. But this method can be costly and leave your perfect credit rating in the hands of an independent, non-interested, 3rd party. If you can sleep at night with that decision, great. If not, do it yourself.
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