You are a homeowner - congratulations!
Your home is likely the largest investment you will ever make, and you want to make sure that you handle that investment in the smartest way possible.
If you pay your mortgage monthly, like most homeowners, you’re making 12 payments a year.If you look at the closing documents you received at the real estate closing, you will see a disclosure that shows you the amount of interest you pay over the life of the loan - many tens or hundreds of thousands of dollars! Did you know that you can easily lower your effective interest rate and pay off your mortgage in record time?
Bi-weekly mortgage payments
When you enroll in a bi-weekly payment program, you pay half your monthly amount once every two weeks instead. There are 52 weeks in a year, so this works out to 26 bi-weekly payments — or, in effect, 13 monthly payments.
“Because you’re making the equivalent of 13 monthly payments each year, you’ll pay less total interest while lowering your principal balance at a much quicker pace,” says Joe Zeibert, managing director of Ally Home, a division of Ally Bank in Charlotte, N.C.
Zeibert gives the example of a 30-year fixed loan of $250,000 at a 4% interest rate. “Bi-weekly payments would save a borrower nearly $30,000 in interest charges and have the loan paid off in five fewer years,” he says. Even if homeowners stayed in their home for only seven years, they would still save several thousand dollars in interest charges while paying off $10,000 more in principal, which they could then use toward a larger down payment on their next home, Zeibert says.
Some mortgage lenders offer bi-weekly payment options. For example, Navy Federal Credit Union offers a dedicated program for those who want to make payments every two weeks indefinitely, says Kevin Torres, a mortgage product strategist at the credit union. It also has a free Budget Easy program that lets you make those bi-weekly payments automatically if you want or switch back to monthly payments if your finances change.
If your lender doesn’t offer a bi-weekly payment option, you can easily take matters into your own hands.
Take your monthly mortgage payment and divide it by 12. Make an extra principal-only payment of that amount every month. Or save that amount every month for 12 months in a separate savings account, then make one extra mortgage payment for that year using the total, which is the equivalent of how much extra you would pay annually on a bi-weekly plan.
Another simpler option is just to make extra payments each month in even amounts such as $100 or $250 per month. Whatever system you use, try to be consistent for the highest benefit.
Before you implement this strategy, be careful to confirm with your lender that there are no prepayment penalties on your loan and that the extra payments will be applied entirely to your loan’s principal rather than to principal plus interest.
“Bi-weekly payments are certainly worth making if your finances allow for it,” Torres says. You can use a bi-weekly mortgage payment calculator to estimate your potential savings.
One final note - beware of payment processing companies. 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 a setup fee in the range of $300. Some also charge monthly fees, and it may be hard to get out of the contract once it begins.
Even worse, some of these services simply hold onto your second payment for two weeks and just make monthly payments on your behalf, nullifying the impact of one extra annual payment.