For most people, the mortgage payment is their single biggest expense every month. Depending on your property, your home loan, the amount you put down at closing and what kind of interest rate you have, your mortgage payment could be hundreds or even thousands of dollars. Because a mortgage payment is usually a homeowner’s largest monthly financial obligation, most people don’t consider paying it twice a month. However, when you make bi-weekly mortgage payments, you don’t necessarily have to pay double what you would normally pay – in fact, most bi-weekly payers simply divide their mortgage payment in half and pay that amount every two weeks. While it may not be the best solution for everyone, there are certain benefits associated with making bi-weekly mortgage payments – namely, saving thousands in interest and building equity faster.
The way bi-weekly mortgage payments typically work, is that the homeowner makes two, smaller loan payments each month instead of one larger payment. Because there are 52 weeks in a standard year, and since the homeowner would be making a mortgage payment every other week, they would wind up paying a total of 26 mortgage payments in a year (the equivalent of 13 monthly payments).
Since there are only 12 monthly mortgage payments required in a conventional mortgage payment plan, a bi-weekly arrangement will produce one extra payment per year. This will help reduce the loan principal balance sooner and can shave off tons of interest in the long term.
It should be noted that bi-weekly mortgage payments are more beneficial when interest rates are higher. To give you an idea of how that works, let’s say you have a 30 year fixed rate mortgage at 7 percent; with bi-weekly payments, it would take you a little more than 23 years to pay off the loan instead of 30, saving you roughly seven years. You would also save more than $33,000 in interest on every $100,000 of principal, presuming you began paying bi-weekly at the start of the loan. Now, if we used the same loan at a 4.5 percent interest rate, the time it would take to pay off the loan would be closer to 26 years and the homeowner would save roughly $13,600.
As rates have been notoriously low the last few years, bi-weekly payment plans have diminished in popularity. Now that rates are beginning to climb, lenders may start to see the trend come back around. While bi-weekly plans will have a greater impact loans with higher rates, that’s not to say they aren’t worth looking into, even if your rate is fairly low. The best thing to do is to speak with a trusted financial adviser or mortgage consultant. They can run the numbers for you and discuss whether or not bi-weekly payments will be beneficial to your situation. Depending on how many years you plan to own the house, how close you are to retirement, and your other financial goals, bi-weekly payments may not make sense.
One other thing to consider before signing up for bi-weekly payments is whether or not you’re willing to fork over extra money each month for convenience fees. A lot of banks offer very easy, convenient bi-weekly payment plans; however, this level of convenience usually comes at a cost.
With most banks, you can choose to begin paying bi-weekly upfront, or you can opt to make bi-weekly payments as you go. Bankrate.com did some research on some of the nation’s top mortgage servicers to find out just how much more it would cost to sign up for this service. Here’s what they found:
“Of the top five mortgage-servicing institutions, four charge enrollment fees that range from $295 to $379. Three also levy additional charges on every transaction. If you want to pay as you go – without the hefty upfront charge – fees from the same top five servicers average from $4 to $9 a month.”
This means that if you choose to enroll in bi-weekly payments from the get-go, you’ll have to hand over a couple hundred dollars in addition to paying an extra couple dollars per transaction. Fortunately, these services are offered as a convenience and not a requirement.
A great alternative to signing up for your bank’s automated bi-weekly plan is to simply add an extra payment when you can, or add more to your principal balance when you make your payment online. Even if you physically mail a check every month, most payment tickets will have a space where you can write in an amount to go towards principal.
Since bi-weekly payments will equate to one extra monthly payment per year, simply add 1/12 of your payment each month and by the end of the year, it will be just like you made bi-weekly payments – only you didn’t have to pay extra fees and enrollment charges to do so!
Another option would be to make one extra full mortgage payment per year. If you get a bonus at work, win a sweepstakes, or inherit money, you might want to consider using it to make an extra mortgage payment. Or, if you get paid bi-weekly, you will most likely have a month where you receive three paychecks instead of two. Take that extra paycheck and put it toward the mortgage!
For more information on making bi-weekly mortgage payments, speak with a qualified home loan specialist. Don’t have one yet? Use the rate table below to find a mortgage lender of broker serving your community.