Your mortgage payments automatically get set up on a monthly due-date. You have to pay the minimum amount each month. What if you’d rather pay biweekly? Is it an option? Better yet, is it worth it?
You probably already know, though, that paying extra towards the principal will save you money in the end. Borrowers making as little as one extra payment per year can knock an estimated 5 years off their loan term and save thousands of dollars in interest. So how does paying every other week help you? We discuss it below.
What are Biweekly Payments?
Borrowers making biweekly payments make a payment every other week. In order to ensure that they meet the minimum required payment, they divide the mortgage payment in half. This way the full amount is at the bank by the due date.
What you do when you divide your payment in half, though is make an extra payment. There are 52 weeks in a year. This means you pay half of your mortgage 26 times. This comes out to 13 total payments. Voila! You have your extra yearly payment made without going broke!
Is it Worth It?
The bigger question is whether making these biweekly payments is worth it. What do you have to gain? If your lender does not charge you anything for making the extra payment, you are in good shape. You stand to save a lot of money if you stay in the home for the term of the loan. Even if you move before the term ends, you’ll still save money because you’ll have knocked more principal off your loan. You’ll walk away with more money in your pocket.
However, there are times when it may not be worth it. Companies that offer to help make the biweekly payment option easy for you are in it for a profit. They offer to set you up on the plan and help you own your home much faster. It sounds great, until you realize the fees involved. Some companies charge a setup fee. Others charge the set-up fee and a monthly service fee. Suddenly, that extra money you made by making larger payments disappears.
Make Biweekly Payments Yourself
There’s good news, though! You can make the biweekly payments yourself. First, check with your bank. Make sure they allow more frequent payments without charging you. Most loans today do not have a prepayment penalty, but it’s worth checking. Once you know you won’t be penalized, do the following:
- Divide your monthly payment in half
- Start making the half payment two weeks before your due date
- Make the second half the week the mortgage is due
- Continue the process until your loan is paid in full
If you aren’t a fan of making so many payments, there’s another option. Take the principal portion of your monthly payment and divide it by 12. Then set aside that amount every month. Keep it in a separate account so you don’t spend it. At the end of the year, you’ll have an extra principal payment. Make a one-time extra payment towards your mortgage and you have the same effect as making biweekly payments.
If you don’t have extra money each month, but know you’ll come into a windfall at some point during the year, you can use that money as well. It’s the same concept – you make a one-time extra payment that equals one annual principal payment. At the end of your term, you’ll see the fruits of your labor.
Whether you prefer biweekly payments to keep things consistent or you are disciplined enough to make one extra payment per year, you’ll make out on the deal. You’ll cut the interest you pay in total and walk away with more money in your pocket when you sell your home.