Bi-Weekly Mortgages: Not Always a Scam, But Not Always a Good Idea, Either

Want  to cut thousands of dollars and years off your mortgage? All it takes are a few simple steps! But here’s a word of advice—don’t pay someone to do it for you, and do your homework first. Sometimes those savings aren’t what they’re cracked up to be.
Yesterday, the Consumer Financial Protection Bureau, a government watchdog agency established after the housing collapse, sued Nationwide BiWeekly Administration Inc., a company that promises homeowners big savings on their mortgages in return for a fee. The Ohio-based company touts its Interest Minimizer program as a way for people to save billions of dollars in interest, quickly build home equity and easily manage monthly bills.
The concept is sound–Nationwide simply took an old idea and found a way to make money from it. What the CFPB didn’t like were the company’s marketing and fees, which can add up to hundreds of dollars before generating any savings. In its lawsuit , the bureau accused Nationwide of misleading customers about costs and their potential to save money.
Generically speaking, here’s how a bi-weekly mortgage plan works. Typically, you make 12 mortgage payments a year. But a lot of people get paid every two weeks. What if you made half a mortgage payment every time you got paid? That’s 26 payments a year, or an entire extra month of payments.  Another approach: If your loan is new, pay a few extra dollars a month toward your principal balance. Thanks to the beauty of amortization, you’ll pay your loan down years sooner and save on interest.
The problem? Costs are front-loaded and savings are back-loaded, so it literally takes years to see real results. Very few of us will live in a house long enough to get the real payoff—an early mortgage-burning party. And if your interest rate is low, like most are these days, there might be better uses for your money than paying down a cheap, tax-deductible loan.
Companies that charge homeowners to set up bi-weekly plans push the savings timeline out even further because of their up-front fees. Nationwide charged customers about $49 million to set up and manage mortgage-payment plans between 2011 and 2014 , according to the CFPB complaint.
What did homeowners get in return? Take the hypothetical example of a customer with a $160,204 mortgage at 4.125 percent interest. Under Nationwide’s bi-weekly payment plan, it would take that person nine years just to recover their $1,200 in fees, according to the CFPB. It would take two decades before he saved even half of what Nationwide promised, the CFPB claimed. Who stays in their house that long?
“A substantial number of consumers will not stay in the program long enough to achieve any savings,” CFPB lawyers wrote. Only a quarter of people in Nationwide’s Interest Minimizer program at the end of last year had been enrolled longer than four years, according to the lawsuit.
Nationwide and its lawyers didn’t return calls seeking comment, and judges and juries eventually will decide if the consumer bureau is telling it straight.
In the meantime, you can probably set up your own bi-weekly mortgage payment with a phone call to your lender, at zero cost. Bankrate has a free mortgage calculator here to get you started. Pay close attention to the chart at the bottom. Will you really be in your home long enough to see any savings? Call your lender and a financial advisor before making any big moves.