How to Pay Your Mortgage Biweekly
Paying your mortgage can be a real balancing act: the more money you pay and the more frequently you pay, the more quickly your loan will be paid off. However, this means that each individual payment will be more expensive. Bearing this in mind, many people find biweekly mortgage payments, which means making a mortgage payment every two weeks instead of once a month, to be a good middle ground, as you can finish paying off the loan six to eight years earlier. If you are interested in accelerating your payments, you will need to consider your budget and be on the lookout for scams.
Understanding How It Works
Look at your monthly statement.You will see that part of your money goes to principal (the amount you borrowed), and part of it goes to interest (the amount the lender charges for the use of their money).
- The original principal does not increase, but the interest does accumulate over time. Thus, the longer it takes you to pay off a loan, the more you will pay. This is called the amortization process.
- Consequently if you can pay off your loan faster, you will not need to pay as much interest, ultimately saving yourself money. This is the principle behind biweekly mortgage payments, a form of mortgage acceleration.
Look at a calendar.There are twelve months in a year, so if you pay your mortgage once a month, you make 12 payments over the course of a year.The way it works out with a biweekly mortgage, however, is that you actually end up making the equivalent of 13 monthly payments, which is why it accelerates your mortgage.
- There are 26 two-week periods in a year. If you are making 26 half-payments each year, that works out to 13 full payments. If you are simply paying once a month (months don't have exactly four weeks), you will be making only 12 full payments each year.
- In the long run this means that you will pay off your mortgage faster.
- It is important to note that you are not actually sending in payments every two weeks. If you do this, your lender may simply think you have made a partial payment, and they may send it back, charge you a late fee, and hurt your credit.
- Instead, follow the instructions in Part 2 below to figure out a payment structure that is the equivalent of paying every two weeks.
Weigh the benefits.Paying off a mortgage faster comes with a lot of advantages, but it won’t be equally helpful for every borrower. Think about your situation before jumping into this plan.
- By limiting the accrual of interest, you’ll be saving yourself money over time, perhaps even thousands of dollars. Why spend money on interest if you don’t have to?
- The equity of your home is the difference between the balance owed on your mortgage and the market value of the home. By paying off a mortgage more quickly, you may be able to increase your equity faster.
Weigh the costs.Mortgage acceleration is not for everyone. There are three questions you should ask yourself before embarking on this project:
- How long do you plan on staying in the house? If it is less than six years, accelerating your payments might not be worth it.
- Can you afford to make an extra payment each year? With biweekly payments, you’ll be spending more in the short-term to save money in the long-term. Are there other big expenses toward which you would rather put this extra money, like starting a business or going back to school? Think about the big picture.
- Do you have the discipline to put extra money aside? While there are biweekly mortgage-payment services that can manage the process for you, those services involve an extra fee for you. It would be better if you can discipline yourself by simply putting a little bit of extra money aside with each paycheck to make accelerated mortgage payments. Can you do this? Do you want to?
Doing It Yourself
Make the calculations.Take your monthly mortgage payment and divide it by 12. This is the amount that you want to add to each month’s payment to make the equivalent of 13 payments a year.
- You can instead simply send in one additional full payment a year. By doing this you will not save quite as much in interest over the life of your mortgage.
Contact your lender.Before embarking on a biweekly payment plan, it’s important that you let your lender know what you are doing.
- Make sure that they do not impose a penalty for early payments. If they do, you’ll have to weigh this penalty against the money you will save.
- Let your lender know that you want the extra money you're paying to be applied to the principal, not interest.
Overpay a little bit each month.If this plan sounds like too much work (or more money than you can afford), you can instead add a little bit of money to each monthly payment. Just make sure you tell your lender that you want it to go toward principal. This won't pay off your mortgage as quickly, but it will save you some interest along the way.
- For example, if you usually pay 0 a month, you can increase your payment to 00 a month.
Be wary of special services.You will probably be contacted by companies that promise to save you money by managing your biweekly payments for you. You would give your money to them every two weeks rather than paying your lender once a month. However, they will charge a fee for their services, which may outweigh the money you would save in interest. Be wary of such services: they may not be worth the cost.
- In addition to charging you money, these companies are unregulated, and your money is uninsured. There is no government agency that regularly checks up on these companies to make sure they are adhering to sound business practices, so there is no guarantee that your money is safe.
- These companies are not connected to your lender (even if they imply that they are), so in allowing a third party to manage your mortgage, you are essentially handing your money over to an untested stranger.
- Contact your lender. If their name is being used by fraudulent companies, they will want to know. Additionally they may be willing to help you set up an accelerated mortgage program.
Contact government regulatory agencies.State or federal regulatory agencies (like the Consumer Financial Protection Bureau) are cracking down on mortgage-management companies, so consider contacting them if you come across an obvious scam. Violations could include any of the following:
- Promising that you can save money even if your payments stay the same.
- Claiming that you will save money immediately (as any significant savings will take years).
- Intentionally misstating where the fees you pay will be going.
- Pretending to be associated with your lender.
QuestionCan my bank charge me a fee for biweekly payments?
Real Estate BrokerReal Estate BrokerExpert AnswerThis would be up to the individual lender and the terms of the mortgage. You may be able to negotiate any fees with the lender.Thanks!
Video: BENEFITS OF BI-WEEKLY PAYMENTS EXPLAINED: The FACTS
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