Should You Make Bi-Weekly Mortgage Payments?

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Many US homeowners have mortgages with monthly payments. However, have you considered other options like biweekly payments? Biweekly payments can lead to long-term savings. Let’s explore how mortgage payments work and the benefits of choosing biweekly payments.

When you secure a loan to buy property, you negotiate terms for down payment, interest, and repayment. The agreed-upon total, including the borrowed amount and interest, is paid back over a specific period. Most homeowners choose a 30-year fixed-rate loan, but there are other options like a 15-year loan or an adjustable-rate mortgage. Regardless of the plan, monthly payments are made towards the loan balance and interest. Initially, more goes towards interest, but as payments continue, the loan balance and monthly interest due decrease.

Now, let’s talk about payment plans. Lenders typically offer two options: monthly or biweekly. The traditional monthly plan is straightforward, with a set amount paid on the first of each month, clearing the loan by the end of the term. However, this method can cost more due to interest payments. The biweekly plan involves paying half the monthly amount every two weeks, resulting in 26 payments per year and the same total paid as the monthly plan.

When deciding between monthly and biweekly payments, consider all aspects. The monthly plan is convenient and easy to budget for, but it takes longer to clear the loan and accumulates more interest over time. The biweekly plan allows for quicker payoff and long-term interest savings, but it requires managing more frequent payments. With biweekly payments, you make an extra payment each year, which can significantly reduce the loan term. However, this additional payment might strain your finances.

So, how does this all work in numbers?

Let’s say you want to finance a home for $200,000. With a 30-year fixed-rate mortgage at 7% interest, you’ll need to pay $1,331 per month for principal and interest. If you choose the biweekly payment plan, you’ll pay $665.50 every two weeks, totaling $1,331 per month. However, since there are 26 weeks in a year instead of 24, you’ll make an extra payment of $1,331 each year. This, along with more frequent payments, helps you pay off the principal faster and reduces the interest. Over the life of the loan, you’ll pay $279,017.80 in interest with monthly payments. But with a biweekly plan, you’ll only pay $210,092.51, saving an impressive $68,925.28! Plus, you’ll finish paying off your loan in 284 months instead of 360, becoming debt-free 6.3 years earlier. To see the difference in savings over time for a specific scenario, you can use a biweekly mortgage calculator.

Why choose biweekly mortgage payments?

The differences between biweekly and monthly payments are clear: payment frequency, total repayment time, and interest accrued. The number of annual payments has a significant impact on your mortgage’s overall cost and repayment duration. Making an extra payment each year can lead to faster loan repayment compared to monthly installments, making biweekly payments an attractive option for early mortgage clearance.

However, there are a few things to consider.

Your mortgage lender may charge setup and transaction fees, increasing your overall expenses. Not all lenders accept biweekly payments or use a third-party processor to handle the additional processing involved. In such cases, the third-party processor may charge additional fees. It’s crucial to ensure your chosen lender or processor allows biweekly payments and applies them correctly. If the payments are not applied twice a month, you won’t fully benefit from interest savings, as payments will only be applied once a month. The earlier these payments are processed, the more you save, and the better it is for your debt-to-income ratio!

Are there other ways to pay off your mortgage faster?

Yes, biweekly payments are one way to become mortgage-free earlier, but they’re not the only strategy. You have options like refinancing, making extra principal-only payments, and considering bimonthly mortgage payments. It’s important to communicate with your lender about any unique payment plans you want to make, as different lenders have different rules and fees associated with these strategies. Understanding what they offer and the associated costs is crucial.

Accelerate Mortgage Payoff: Save Money, Own Your Home Sooner!

In conclusion, making payments either every two weeks or twice a month can indeed expedite the process of paying off your mortgage, and in the long run, save you some money. With prudent budget management, you’re closer to fully owning your abode! 

The insights shared in this post are solely for general information and do not serve as particular advice or recommendations for anyone or any specific investment product or security. The perspectives expressed herein are fluid and can alter any time. Please see Foothold’s disclaimers.

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