October 21, 2002, Revised January 13, 2003, October 15, 2007, February 4, 2008

The simple interest biweekly mortgage (SIBW) has a very small advantage over a standard biweekly or a "13/12 roll-your-own", where the borrower increases the monthly payment by 1/12 of the payment every month. The price charged by Primerica for its SIBW is far in excess of what it is worth.

"How much more valuable is a simple-interest biweekly mortgage than a standard biweekly?"

Not much, as I will demonstrate.

Standard Versus Simple Interest Biweekly

On a standard biweekly (SBW), borrowers pay half the monthly payment every two weeks. Over the course of a year, they make 26 half payments, which is the equivalent of 13 full payments. That extra monthly payment, however, isn’t credited to the borrower’s account until the 12th month. The account is credited with monthly payments for the first 11 months, and with a double payment in the 12th month. The process repeats in each subsequent year.

On a simple-interest biweekly (SIBW), in contrast, each half-payment is credited to the borrower’s account immediately. In contrast to a SBW, which only credits payments once a month, an SIBW credits payments every two weeks. This accelerates the reduction in the loan balance, which results in an earlier payoff and reduced total interest outlays.

As an example, lets look at a 30-year fixed-rate mortgage of $100,000 at 6%. Without modification, this mortgage would, of course, pay off in 360 months, and total interest payments would be $115,832. Converted into an SBW, it would pay off in 295 months and have total interest payments of $91,927. If instead it is converted into an SIBW, it would pay off in 294.5 months and total interest payments would be $91,022.

The difference of $905 in interest payments between the two biweeklies is very small when one considers that it covers 30 years. One way to put it in perspective is to ask, what interest rate on the SIBW would provide the same interest payments and month of payoff as the SBW? The answer is 6.063%. A borrower should be indifferent between a 6% SBW and a 6.063% SIBW.

Simple Interest Biweekly Versus a 13/12

The advantage of a SIBW is reduced even more if, instead of being compared to a SBW, it is compared to a "13/12 roll-your-own" extra payment scheme. In this scheme, which is completely under the borrower’s control, the borrower adds 1/12 of the monthly payment to the payment every month.

A 13/12 would pay off in 295 months, with interest payments of $91, 279. Interest payments are a little smaller than on the SBW because the 1/12 extra payment is credited every month.

Interest payments are a little higher on the 13/12 than on the SIBW because of the difference between crediting payments monthly and crediting them every two weeks. The difference, however, is altogether trivial. Let’s ask the same question we asked before --how much higher could the interest rate go on the SIBW before it lost its advantage over the 13/12? The answer is 6.018%.

The calculations above assume all payments are made on the due date. But in practice many borrowers pay late. On a standard monthly payment mortgage, payments can be made up to the 10th or the 15th day of the month without any cost. A SIBW, in contrast, accrues interest daily, which means that the borrower pays interest for every day that the payment is late. If they pay early, of course, they save interest, but this is less common.

The Primerica SIBW

As noted above, a borrower who wants to accelerate repayment would find a 13/12 plan on a 6% standard loan equivalent to a SIBW at 6.018%. Both would pay off at the same time, with the same interest savings relative to the standard loan without any extra payments. Yet Primerica would offer this loan at about 8% and claim that it would save the borrower money.

What is their argument? One thing they do is to compare total interest payments on their higher-rate SIBW with total interest payments on the standard mortgage. These comparisons show lower payments on the SIBW, because the SIBW requires 13 payments a year and the standard mortgage only 12. They do not compare their SIBW with a standard biweekly or a 13/12, which are comparable to the SIBW in having 13 payments a year, because it would reveal the Primerica SIBW to be a big loser.

Another thing they do is to distort the way a standard mortgage works to make it appear that the SIBW amortizes in a way that is more favorable to the borrower. A borrower who was subjected to a pitch from a Primerica loan officer reported it to me as follows:

"The way a traditional mortgage works, every time you pay off any extra principal, nothing is recalculated – extra payments are only chipped off the tail end of the loan…The way our approach works, every time you make a payment, the entire loan is reamortized… So with each and every payment, you’re paying interest on less principal…The reason we charge a higher interest rate is because we’re putting so much money back in your pocket."

The description of how "a traditional mortgage works" is flat-out wrong. I once heard about a small credit union that held a borrower’s extra payments until they were large enough to pay off the balance, but this is extremely rare. The overwhelmingly dominant practice is to credit extra payments on a monthly basis, as I assume in my spreadsheets.

The SIBW might have a little added value to a borrower who has fluctuating income and wants to make extra payments whenever income becomes available. With a SIBW, the borrower can get immediate credit whereas on other loans, credit is deferred until the end of the month. Borrowers of this type should explore the CMG mortgage, which has the same feature but is not over-priced. See The CMG Plan: Your Mortgage as a Checking Account.

Note: All the numbers referred to above were derived from the spreadsheet Biweekly Mortgages. For more on this topic, read Does Refinancing at a Higher Rate Make Sense?