Should You Opt for a Bi – Weekly Mortgage Plan?

The present low-interest-rate environment has led many homeowners to think about something else besides the COVID-19 pandemic. Many are wondering whether they should stick with their current mortgage or refinance. Some others are thinking on the lines of opting for a different payment strategy that can help them pay off their mortgage early.

There are many ideas and options out there which can help you pay down your mortgage faster and also save money in the long run. One of these is opting for a bi-weekly mortgage payment.

Let us take a look at what bi-weekly mortgage payments are and how it can work for you.

How Does A Bi-Weekly Mortgage Payment Work?

All types of mortgage loans require homeowners to make monthly payments. But, with a bi-weekly payment plan, you will be paying half of your monthly payment every two weeks. It looks like that same thing, right? However, there are 52 weeks in a year (as two months of the year have five weeks), so you will be making 26 payments every year. This equates to 13 full-sized payments. That is one extra monthly payment each year which will go towards shortening the lifespan of your loan.

Advantages of Bi-Weekly Mortgage Payments

The key advantages of bi-weekly mortgage payments are:

1. Reduces Your Mortgage Term and Interest Costs

Now when this extra payment is applied directly to your principal it will help you cut a surprising amount of interest off your loan. It will also enable you to pay off your mortgage early.

Here is an example that can help you understand your true savings. Assuming you have a 30-year mortgage of $250,000 at a fixed interest rate of 4 %, then your monthly payment will be $1,194 and your total interest rate will be $179,673. However, in the same scenario, the total interest that you pay by converting to a bi-weekly plan is $150,450.40 which is a savings of $29,000 over the life of your loan and in addition you will pay off your loan in 25 years instead of 30.

2. Helps You Build Home Equity Faster

Another advantage of bi-weekly payments is that you can build home equity sooner as you are paying down more principal each year. This means you can take advantage of a home equity loan or home equity line of credit (HELOC) to make improvements to your home, consolidate to pay down debt or pay for your child’s college education. Another benefit is that once you have a 20% home equity you can stop paying for your PMI (private mortgage insurance) and thus save money every month.

3. Easier To Budget & Make Extra Payments

If you make bi-weekly payments it will help you budget your expenses on a lower scale rather than having to pay one large payment every month.

This will also be easier on your budget as one extra mortgage payment is effectively divided by 26 and is spread over the entire year.

Things You Need To Consider

Before you choose a bi-weekly loan schedule you should verify the following as different lenders have different rules.

  • Some mortgage lenders charge a fee for setting up this method while others may not. So talk to your lender and find out if any fees are associated with bi-weekly payment plans.
  • Most mortgage lenders nowadays do not charge any prepayment penalties. However, look over your contract or speak to your lender to find out if you will be penalized for paying off the loan early
  • Some lenders hold your bi-weekly payments and only apply it to the accrued interest and principal once a month. Though this somehow negates the advantage of bi-weekly payments, you will still be paying one extra payment every calendar year.

So, before you set up a biweekly payment, crunch your numbers and make sure you will get ahead financially.

Tips for Creating Your Own Bi-Weekly Mortgage Payment Plan

If your mortgage lender does not offer a bi-weekly payment option or you want to opt-out of any additional fees you can create one yourself. It is relatively very simple.

You can divide your monthly payment by 12. Then add this one-twelfth amount to your monthly automatic payment. At the end of the year, you will have paid one full extra payment.

Another option is to transfer money from a checking account to a savings account every two weeks and every month transfer one full monthly payment to the lender. However, you should ensure that this extra payment is applied to your principal and not to the interest.

Both methods will help you bring down your mortgage balance and pay off your mortgage early.

Bottom Line

Paying off your mortgage faster no doubt has a host of benefits. You can free up your cash to travel, reduce your retirement expenses, or for other long-term plans. However, when you decide on a bi-weekly mortgage payment plan make sure you automate your payment process and budget your finances to achieve success.

You can contact our loan experts to learn more about your mortgage payment options and how you can reduce the interest you pay over the life of a mortgage loan.