Middlemen and the Biweekly Mortgage

Question: We have been contacted by a company based in Newport Beach that has been trying to sell us on the advantages of letting it handle our mortgage payments for us. The pitch is that by making half of our normal monthly mortgage payment directly to them, every other week, instead of sending in the whole thing once a month to Citicorp, as we do now, we can cut our 30-year mortgage down to about 20 years and save thousands of dollars in interest.

The Times Real Estate section apparently had a couple of stories on the “biweekly mortgage” some time ago, and they apparently confirm what this company is telling us.

Our mortgage is for about $100,000, and the “initiation fee” for letting this company do this for us would be about $1,000. When we asked why we couldn’t make the same arrangement with Citicorp ourselves, we were told that Citicorp wouldn’t set up this kind of bookkeeping for individual mortgagors.

We’re wondering if the biweekly mortgage is really that good, and if this is the only way to go about it.--T.G.

Answer: The biweekly mortgage has a lot going for it, certainly, even though the mathematics of it is a little baffling for those of us who count on our fingers.

By making half your normal monthly payment every other week (26 times a year) you are making the equivalent of one extra monthly payment per year since--regardless of which day of the week you use as your focal point--there are going to be two months in every year when you’ll be making a third half-payment.

The oddity comes in the fact that such a superficially simple device can have the impact that it does. For instance, a 30-year, biweekly mortgage at 9% will pay the house off in about 21 years, instead of 30, and will save about $63,819 in interest. On a $200,000 mortgage the interest saved is $127,638.

The scheme is sometimes known as the “Canadian plan” because it originated several years ago with Canadian credit unions and was fueled by the fact that most of the credit union members were paid biweekly (as are, by most estimates, about 80% of Americans too) and because, under Canadian law, mortgage interest isn’t tax deductible.

So, if the biweekly is such hot stuff, how come it isn’t more common on this side of the border? Thus far, the hybrid mortgage has been pretty well confined to the Northeast and to pockets in the Midwest. In all, according to estimates by Fannie Mae (the Federal National Mortgage Assn.), about 150 to 200 lenders offer the biweekly.

What’s the problem? Lenders say it’s twofold: the biweekly doubles the paper work of the conventional, monthly mortgage--and that’s primarily the reason that Betsy Martin, Citicorp’s public affairs spokesperson in St. Louis, advances for your lender’s cool reception to the idea. The other reason: There’s no secondary market for biweekly mortgages. In other words, most lenders today are retailers who write home mortgages but then turn right around and sell them off--yes, indeed, at a profit--into the secondary market: Fannie Mae and Freddie Mac (the Federal Home Loan Mortgage Corp.). They, in turn, pool the mortgages and sell them off as securities to individual and institutional investors. This meant that a lender writing a biweekly mortgage would have to keep it in his own inventory as an investment or sell it off to a private investment firm without Fannie Mae and Freddie Mac’s restrictions.

The “too much paper work” argument isn’t really as valid as it used to be. Computer software designed to handle biweekly mortgages is now pretty commonplace and has been for some time--and particularly in this age of the electronic transfer of funds, which is universal with biweekly mortgages. That left the “no secondary market” as the real bugaboo in the offering of such mortgages.

But now, even this is breaking down with Fannie Mae’s announcement this week that it will begin buying biweeklies beginning Feb. 1--which could trigger a wholesale offering of them.

So, in your case, what’s the answer? Should you pay this outfit to collect your mortgage payments every other week and funnel them to Citicorp? Contrary to what this company’s representatives may have implied, Citicorp’s Martin said, Citicorp doesn’t accept biweekly payments from middlemen any more than they will from you.

“We’ve had experience with similar companies,” Martin added, “and all they do is collect the home buyer’s biweekly payments and then turn around and pay us, monthly, the same way the home buyer, himself, does. At the end of the year what they’ve done is to accumulate enough extra money in this ‘float’ to make one additional monthly payment--which is exactly what the home buyer could do on his own and which is what we advise people to do.”

And it doesn’t cost any $1,000 “initiation fee” to do it yourself, and if you’re going to be laying aside a little cash every month to make that extra month’s payment, why shouldn’t you collect the interest income on it rather than the middleman?

Here’s another consideration: the average American moves about every eight years. After you’ve paid this outfit its $1,000 fee, it’s going to be money down the old drain if you sell your home and move in a few years.