Should you be making bi-weekly mortgage payments?
Most homeowners make their mortgage payments once a month. With a bi-weekly mortgage payment plan, you can make half of your regular monthly payment every two weeks, so you can pay off your mortgage faster.
How do bi-weekly mortgage payments work?
Let’s say your mortgage payment is $ 1,000. If you paid this once a month, you would pay $ 12,000 over a year.
With a bi-weekly mortgage payment plan, you would make half of your mortgage payment, or $ 500, every two weeks, for a total of 26 payments. At this rate, at the end of the year, you would have paid $ 13,000, which is $ 1,000 more than what you would have paid if you had made monthly payments. By going this route, you would essentially be making an extra payment for the year.
You can find out how much bi-weekly payments can save you with Bankrate’s bi-weekly mortgage payment calculator.
Why should you be making bi-weekly mortgage payments?
By making bi-weekly payments, or an additional payment per year, you pay off your mortgage sooner and save on interest.
“Anytime you can pay a little more to reduce your principal, you will owe less interest in the future,” says Glenn Brunker, director of mortgages at Ally at home. “Also, as you pay off the principal balance, the less of your payment will go to interest, and more will go to principal, which will lower it even more. “
The caveat is that you will need to make sure that the additional payment is actually applied to the principal of the loan and not to the interest.
Let’s say you have a 30-year, $ 250,000 fixed rate mortgage with an interest rate of 3.2%. Your monthly payment (excluding insurance and taxes) would be $ 1,081. Assuming you paid once a month, you would pay around $ 139,260 in interest over 30 years.
In the same scenario, by making payments every two weeks, which is about $ 540 every two weeks, you reduce your total interest to $ 119,369, which saves you over $ 19,800. You would also pay off the loan in 26 years, instead of 30.
Another reason to make this extra payment is to build equity faster. You can borrow against the equity in your home for a variety of purposes and in different ways, such as with a refinancing of collection, home equity loan Where Home equity line of credit (HELOC).
In addition to saving you money and achieving more equity sooner, it may be a good idea to make payments every two weeks if you earn paychecks every two weeks, Brunker says, noting that “an adjusted payment schedule can better align with [your] monthly cash flow.
Cons of Bi-Weekly Mortgage Payments
Bi-weekly mortgage payments can save you money, but not all are good. In addition to checking if your lender allows it, consider these drawbacks:
1. Less money for other needs
Before committing to bi-weekly mortgage payments, consider whether it would benefit your financial plan. A bi-weekly plan means spending more money on your mortgage each year, which could come from other financial obligations like saving for retirement Where pay off high interest debt. Make sure you build a bi-weekly payment plan into your budget and see if the savings outweigh the losses elsewhere.
“Paying the extra amount means that some of your monthly money is tied up elsewhere, and without proper planning it could affect your budget and your ability to pay for other urgent financial needs besides your mortgage,” says Connie. Heintz, Founder and President of DIYoffer, a sell-by-owner toolkit.
“If you’ve already locked in a low interest rate, speeding up your mortgage might not make much of a difference,” Heintz adds. “You will just be spending more money on paying off the mortgage. “
2. Early repayment penalty possible
Although not common, some mortgages come with a early repayment penalty that lenders charge if a borrower repays the loan earlier than the repayment schedule requires. Lenders can impose prepayment penalties in several different ways, such as charging 2-4% of the balance or a fixed fee, like $ 3,000. Read your loan documents carefully or contact your lender to see if you would be subject to prepayment penalties.
3. Third party payment plans
If your lender doesn’t offer a bi-weekly payment plan, you might find a third-party company that can do it for you. Be careful, these companies can charge high fees for setting up the plan, as well as additional monthly payments, both of which can eat into your savings. They might even charge you for their services and end up sending payments on a monthly basis anyway, costing you even more.
How to set up a bi-weekly mortgage payment plan
If your lender allows bi-weekly payments and applies the additional payments directly to your principal, you can simply send half of your mortgage payment every two weeks. If your monthly payment is $ 2,000, for example, you can send $ 1,000 bi-weekly.
In general, you won’t need to involve your lender to start making payments this way, according to David Reischer, lawyer and CEO of LegalAdvice.com.
“There is simply no point in involving the lender in changing the terms of the loan, so that a borrower has to make a payment every two weeks instead of the normal payment due once a month,” Reischer explains. “If a borrower wants to make an additional payment to qualify for a bi-weekly mortgage plan, they can simply send a payment every two weeks instead of the payment due every 30 days.”
You can also divide your monthly payment by 12 and store this amount in a savings account each month, then send the accumulated amount to your lender as an additional payment at the end of the year.
No matter how you do it, Heintz says you should “make sure you make it clear that all of that amount goes to your principal balance.” Otherwise, your lender could repay the extra amount or transfer it to your next payment, overriding the bi-monthly payment goal.
To confirm that your bi-weekly mortgage payment plan is working as you expect, make sure that:
- Your lender authorizes a bi-weekly mortgage payment plan.
- Additional payments are applied to the principal.
- There are no prepayment penalties.
- No fees are charged for setting up or maintaining a bi-weekly payment plan.
- Your interest rate remains fixed for the duration of the loan.
Additionally, make sure your lender confirms that all additional payments are applied to principal on a timely basis.
“If I went into a bi-weekly payment plan, I would insist that the payment be released when received,” says Reischer. “If it’s not released by the 15th of the month, assuming it’s sent and received by then, I would make a formal complaint.”
Finally, keep in mind that your monthly payment includes property taxes and home insurance, so be sure to ask your lender if these payments would inflate your escrow cushion.
At the end of the line
If done right, making mortgage payments every two weeks will pay less interest over the life of your loan, saving you money and paying off your balance more. early. However, you must confirm that the additional payments are applied to the principal and ensure that you are not subject to prepayment penalties. Also watch out for fees or offers from third parties.
Also, keep in mind that in some cases, paying off your mortgage faster means you are withdrawing money from other financial obligations. Before committing to bi-weekly payments, carefully review your budget and objectives.