Do you own your home? Are you looking to purchase a new home, or refinance? You may want to look into a bi-weekly mortgage payment instead of monthly mortgage payment.
Why? More payments paid per year.
“I don’t want to pay more!” you say. The thing is, it may not feel like you’re paying much more.
The lower your loan amount and the lower the interest rate, the lower the amount you’ll ultimately pay for your home – with either method. With the bi-weekly payment program, you’re shaving three to six years off your loan simply by paying it on a different schedule.
Have you owned your home for 5 years or so, without seeing a sizable impact on the amount you still owe on your home? Here’s why:
Every mortgage is broken into two parts: part of your payment goes toward the principal of your loan, and part of your payment goes toward interest. In the beginning of your loan, you’re paying a higher ratio of interest to principal than you will later on in your loan. The longer you own your home, and the more payments you make, the larger the portion of your payment is being applied to the principal – the part that helps you.
Traditional (Monthly) Payment Structure:
With the traditional mortgage structure – paying once per month – you make twelve payments per year. With a 30-year fixed rate mortgage, you’re ultimately going to pay 360 payments, assuming you do not sell or move before the end of your term.
Bi-Weekly Payment Structure:
With the bi-weekly mortgage structure, you are paying every other week. You’re still paying roughly the same amount per month, except that there are 52 weeks in a calendar year. This means you would be making 26 payments, the equivalent of 13 “monthly” payments within those same 12 months.
This ultimately means that you’re making an extra payment per year. Worried about remembering to make payments that often? Set up an automatic payment to correspond with your bi-weekly payroll direct deposits.
What You Can Do Instead of Bi-Weekly:
If you don’t have a bi-weekly mortgage payment plan set up on your current loan, that’s no problem! It actually may be better for you not to. Instead, you could divide one of your monthly payments by twelve. Tack that amount onto the principal portion of your payment every month OR throw it into a savings account.
For example: If your mortgage is $1,500 every month, add an extra $125 to your principal payment or savings account.
This means you are paying an extra mortgage payment every year without completely breaking the bank – while you’re still shaving three to six years off your loan. If you put that money into savings every month, then make one lump sum additional mortgage payment per year, you are accruing (albeit a slight amount of) interest in that savings account opposed to giving it straight to the bank every month.
Can’t swing the 1/12 addition to your payment? Why not use a portion of your tax return next year to make an extra principal payment? ANY additional payment on your mortgage is a good idea! You don’t have to do 1/12.
An argument against bi-weekly:
If you choose to tack on the extra mortgage payment yourself instead of entering an actual contract with your bank, you have the option to skip a month or to stop paying extra entirely – if you were to lose your job etc.
Also, make sure that your financial institution is not charging you for the bi-weekly program. If they do, you’ll do better managing it yourself.