September 25, 2017
September 25, 2017
For most homeowners, mortgage payments are paid once a month. Yet some homeowners opt to make a payment twice a month, a proven strategy that can help you pay off your mortgage faster, save thousands on interest and quickly accrue more home equity.
On the other hand, bi-weekly mortgage payments aren’t for everyone. Not everyone has the same financial goals or priorities, and not every lender is as accommodating to paying off your loan early. Still, for some homeowners, bi-weekly payments can be a great choice.
The magic of bi-weekly mortgage payments comes down to simple math. There are 12 months in a year, and so most mortgage borrowers make 12 payments per year. However, there are 52 weeks in the same year, and so if you make a half-payment every two weeks, you’ve mady 26 bi-weekly payments. That comes out to not 12, but 13 full monthly payments over the same period.
Or consider the dollar value of such added payments. If your monthly mortgage payment was $2,000, you would pay $24,000 over 12 monthly payments. However, if you paid $1,000 every two weeks, you would pay a total of $26,000 over the same time period, equal to a full 13th monthly payment each year.
Now consider how paying 13 mortgage payments per year could affect your loan long term. With a 30-year fixed-rate loan, you can expect to pay 360 monthly mortgage payments. Yet if you paid 13 payments per year, you could shave years off the same loan, both because you are prepaying your mortgage ahead of schedule and the fact that each added principal payment reduces your loan’s total interest.
How you can switch to bi-weekly mortgage payments depends on your mortgage lender or loan servicer. Some smaller banks and credit unions simply offer bi-weekly payment options. You may be able to make bi-weekly payments automatically and switch back to monthly payments, if needed, down the road.
However, other lenders may accept bi-weekly payments via a third-party payment-processing company. But there can be drawbacks to this method. Many companies charge a setup fee for handling your bi-weekly payments, that typically runs anywhere from $200 to $500, and then there may be an addition fee for each payment processed. Such charges can add up, defeating the purpose of making the extra payments to save money.
Because bi-weekly payment options aren’t offered by all loan servicers, and because third-party fees can be too costly, many people opt for a third option, which is simply to make your own extra payments. This works well for borrowers who have the self-discipline to keep making their own extra payments over months and years.
Since you’re making your own extra payments on your own initiative, it’s your choice how and when to make them. One method is to take your regular monthly mortgage payment and divide by 12. Then add that amount onto each of your monthly mortgage payments. At the end of the year, the extra change will have added up to an extra full mortgage payment. Another option is to put the same 1/12th-payment amount into a separate savings account each month, then use those savings to make an extra full mortgage payment at the end of the year. You could also make additional payments throughout the year as possible if your income fluctuates seasonally.
If you decide that making a bi-weekly mortgage payment is something that you want to do, the next step is to check in with your loan servicer about your payment options and the loan servicer’s policies.
First, you’ll want to inquire about the company’s own bi-weekly program if they have one. If it’s ran by a third-party firm, you’ll want to find out what the fees are, how your extra payments will be applied, and the procedures for reverting back to monthly payments, if need be. Also, make sure not to submit a half-payment without authorization first, as your loan servicer may consider this an incomplete payment.
Next, find out if there are any prepayment penalties for pay off your loan early. If so, you’ll need to weigh that cost against the money you could save with extra payments. Finally, you’ll want to ensure that any additional funds you send into your loan servicer is applied to your outstanding loan principal and not to principal and interest. Servicers usually do this automatically, but you’ll want to make sure you submit any additional payment per your company’s policy and make sure it’s allocated as intended.
There’s no doubt about it, making bi-weekly mortgage payments can help you pay off your mortgage faster and save thousands on interest over the life of your loan. Plus every extra payment you make is added equity, which will benefit you if you need to sell or refinance down the road.
Still, it’s good to point out that mortgage debt is a low interest form of debt, and that interest is partially tax deductible. So it may make more sense to put the money somewhere else first, like high-interest credit card debt.
It’s also a good idea to make sure your other financial goals are being met before exploring bi-weekly mortgage payments. For instance, an emergency savings fund should come first, and you shouldn’t neglect savings for retirement or college funds. However, once you are able to address these other goals, it’s a good time to think about putting your excess cash toward bi-weekly mortgage payments. There are many upsides and, when done properly and under the right circumstances, few drawbacks.