Should you be making bi-weekly mortgage payments?
When you buy a home with a mortgage, your payments are due monthly by default. In the effort to pay off their mortgages faster and pay less interest over the life of the loan, some homeowners choose to make bi-weekly payments instead.
But depending on how your biweekly payments are processed, they may not help you lower the principal you want. Here’s what you need to know if you’re planning to switch from monthly to bi-weekly payments.
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Why switch to bi-weekly payments?
If you pay your mortgage monthly, like most homeowners, you make 12 payments per year. When you sign up for a biweekly payment program, you instead pay half of your monthly amount once every two weeks. There are 52 weeks in a year, so that equates to 26 bi-weekly payments – or, in fact, 13 monthly payments.
“Because you make the equivalent of 13 monthly payments each year, you’ll pay less total interest while reducing your principal balance at a much faster rate,” says Joe Zeibert, senior director of Ally Home, a division Ally Bank in Charlotte, North Carolina.
Zeibert gives the example of a 30-year fixed loan of $ 250,000 at an interest rate of 4%. “Bi-weekly payments would save a borrower almost $ 30,000 in interest charges and pay off the loan in five years less,” he says. Even if homeowners only stayed in their home for seven years, they would save several thousand dollars in interest charges while paying off an additional $ 10,000 in principal, which they could then use for a larger down payment on their next home. , says Zeibert.
Beware of payment processing companies
Some mortgage lenders offer bi-weekly payment options. For example, Navy Federal Credit Union has a dedicated program for those who want to make bi-weekly payments indefinitely, says Kevin Torres, mortgage product strategist at the Credit Union. It also has a free Budget Easy program that allows you to make these bi-weekly payments automatically if you want or revert to monthly payments if your finances change.
Here’s where it gets tricky: When lenders don’t offer a bi-weekly payment option, some borrowers turn to third-party services that do. However, these payment processing companies charge an installation fee in the range of $ 300. Some also charge a monthly fee and it can be difficult to exit the contract once it has started.
Worse yet, some of these services simply keep your second payment for two weeks and only make monthly payments on your behalf, negating the impact of an additional annual payment. So, if you are contacted by a company offering to save you thousands of dollars by managing your mortgage payments, be careful.
How to do it yourself
The good news is, if your lender doesn’t offer a bi-weekly payment option, you can take matters into your own hands.
Take your monthly mortgage payment and divide it by 12. Make an additional principal payment of only that amount each month. Or save that amount each month for 12 months in a separate savings account, then make an additional mortgage payment for that year using the total, which equals the additional amount you would pay each year with a bi-weekly plan.
Before you embark on this route, however, check with your lender that there is no prepayment penalty on your loan and that the additional payments will be fully applied to the principal of your loan rather than the principal plus the principal. interests.
“The bi-weekly payments are definitely worth making if your finances allow,” says Torres. You can use a bi-weekly mortgage payment calculator to estimate your potential savings.