Does bi-weekly payments make sense in a cash-flow market?

[Luka Jozic]

I understand that doing bi-weekly simply means you are doing 13 mortgage payments a year as opposed to 12. So you get one payment each year that goes straight to principal. I've read other threads on the topic and it seems like the obvious answer is that it depends, as doing bi-weekly pays off your mortgage faster but means less available cash for other investments.

Say we have a typical Cleveland property worth around 150K, assume the monthly PIMI is $1000 and that annual cashflow is $5000. According to my lender, if I do bi-weekly I would pay off the mortgage in 21 years as opposed to 30, shaving off 9 years. That means in 21 years I will have a fully paid off property, and can now cash out refi and buy X more properties. However, by doing so, I'll be paying $1000 extra each year towards my mortgage, reducing my cashflow to $4000/year. So after 21 years I will have either:
1. $21K extra to invest (not even enough for 1 down payment really) if I do monthly.
2. A fully paid off property which now should be worth at least $300K with appreciation, I can access 75% of that with a cash out refi so roughly $225K - refi costs.

To me, its a no brainer to do bi-weekly IF you plan to keep the house for that long AND you do not plan to refinance (rate or cash out). So the follow up question is, does it make sense to keep a property for that long and not dig into its equity for 21 years? What are your thoughts on this?

[Don Konipol]

Quote from @Luka Jozic:

I understand that doing bi-weekly simply means you are doing 13 mortgage payments a year as opposed to 12. So you get one payment each year that goes straight to principal. I've read other threads on the topic and it seems like the obvious answer is that it depends, as doing bi-weekly pays off your mortgage faster but means less available cash for other investments.

Say we have a typical Cleveland property worth around 150K, assume the monthly PIMI is $1000 and that annual cashflow is $5000. According to my lender, if I do bi-weekly I would pay off the mortgage in 21 years as opposed to 30, shaving off 9 years. That means in 21 years I will have a fully paid off property, and can now cash out refi and buy X more properties. However, by doing so, I'll be paying $1000 extra each year towards my mortgage, reducing my cashflow to $4000/year. So after 21 years I will have either:
1. $21K extra to invest (not even enough for 1 down payment really) if I do monthly.
2. A fully paid off property which now should be worth at least $300K with appreciation, I can access 75% of that with a cash out refi so roughly $225K - refi costs.

To me, it’s a no brainer to do bi-weekly IF you plan to keep the house for that long AND you do not plan to refinance (rate or cash out). So the follow up question is, does it make sense to keep a property for that long and not dig into its equity for 21 years? What are your thoughts on this?

This extra payment deal is for consumer/homeowner that will spend all the money he has available on cigarettes, beer, etc. so he “fools” himself into “painlessly” saving money by building extra equity in his one big “investment”.

A professional investor should NOT need to “fool” themselves into “forced” savings.  The only question is can capital be invested at a “risk adjusted” return greater than the amount paid in interest?  If I’m paying 13% interest on a hard money loan the answer is most often pay down the loan as much as possible.  If I’m paying 3.5% on a mortgage the answer would ALMOST always be pay down the mortgage as SLOW as possible and reinvest at higher return. Inbetween requires a more careful analysis. 

There are some scenarios which can change the equation and take priority over the opportunity cost equation demonstrated above.  Asset protection questions, tax questions, and inheritance questions can lead to different answers.  And there’s a “lifestyle” question.  It may not make financial or economic sense, but some people (me) reach a certain asset level and just do not want to deal with debt anymore.