Working Mortgage Updates Bi-Weekly Loan Concept

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Bi-weekly mortgages have traditionally been a niche loan with appeal to only a small segment of the marketplace, but now a new bi-weekly product is likely to make such mortgages far more interesting to consumers.

Called the "working mortgage," the new product has been developed by Fannie Mae and is now available on a pilot basis through four lenders: Bank One Mortgage, Citicorp Mortgage, FT Mortgage, and Old Kent Mortgage.

In general terms a bi-weekly mortgage works like this. Instead of making a monthly payment for $1,200, you instead make partial payments every two weeks, say $600. At the end of the year, with monthly payments you would have paid $14,400 (12 x $1,200) for mortgage principal and interest, while with the bi-weekly you would have sent $15,600 to the lender over the course of a year (26 x $600).

Thus the "secret" of bi-weekly mortgage savings is no secret at all. Savings come not because payments are made every 14 days, but rather because bi-weekly borrowers simply pay more per year, thus their loans are paid off more quickly and they can save thousands of dollars in excess interest.

The "working mortgage" adds several interesting features to traditional bi-weekly products, according to John Gang, Fannie Mae's director of new product development.

• The program has the same 28/36 ratios that lenders use for conventional mortgages. However, the program is set up so that underwriting standards are more flexible. In practice, this means a borrower with a low credit score has a better chance of getting a loan and a solid borrower may qualify for more financing than with traditional underwriting standards.

• The program has a payment flexibility feature. While the "working mortgage" starts out as a bi-weekly product, it may be that instead of a check every two weeks the borrower will be paid weekly or monthly at some point in the future. With the "working mortgage" such changes are easy to accommodate -- rather than re-finance at high cost, just call an 800 number and the loan can be modified to meet the borrower's new arrangement.

• Bi-weekly mortgages are usually tied to the use of a checking or savings account, often one that must be maintained with the original mortgage lender. Under the "working mortgage" however, borrowers can maintain an account with the original lender, another lender, savings and loan association, or credit union, or even some mutual funds. The real criteria is not so much "where" the account is located as much as the lender's ability to make electronic withdrawals from the account. Given that different accounts may pay different levels of interest or have lower costs, this is an important pro-consumer, pro-borrower feature.

• The program produces real savings. Fannie Mae estimates that with a $100,000 "working mortgage" a borrower can save $4,000 in the first five years with the loan, and $10,000 within ten years.

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Published: June 22, 1999

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Editor's Note: This article reflects the opinions of Peter G. Miller only and not necessarily the views of this or any other publication, organization or Website owner.