The majority of mortgages require monthly payments; however, making the switch to biweekly payments can lower your interest costs and possibly hasten the process of becoming a home owner. Making payments every two weeks alone, however, does not ensure these outcomes; in the end, your ability to benefit from biweekly mortgage payments ultimately depends on how your lender manages them.
Unlock the Power of Biweekly Payments: Accelerate Your Mortgage Payoff and Save Thousands on Interest
Dreaming of owning your home outright? Tired of watching your mortgage interest eat away at your hard-earned money? Biweekly mortgage payments could be the key to unlocking faster homeownership and significant interest savings. But before you jump in, let’s dive deep into the world of biweekly payments, exploring its pros and cons, and how to set up a plan that works for you
What are Biweekly Mortgage Payments?
Instead of making one monthly payment, biweekly payments involve splitting your monthly payment in half and making payments every two weeks. This translates to 26 half-payments per year effectively squeezing in one extra full payment compared to the standard 12 monthly payments.
The Magic of Biweekly Payments:
The beauty of biweekly payments lies in their ability to accelerate your mortgage payoff and slash your interest payments. By making one extra payment annually, you chip away at your principal faster, reducing the overall interest you accrue over the loan’s lifetime.
Let’s crunch some numbers:
Imagine a 30-year mortgage with a $1,450 monthly payment. By switching to biweekly payments, you’d make 26 payments of $725 each, totaling $18,850 annually. This translates to a whopping $53,000 in interest savings and a five-year reduction in your loan term!
Benefits of Biweekly Payments:
- Faster Payoff: Shorten your loan term and achieve homeownership sooner.
- Interest Savings: Reduce the total interest paid over the life of your loan.
- Budgeting Simplicity: Align your payments with your biweekly pay schedule for easier budgeting.
- Faster Equity Building: Build equity faster, unlocking opportunities for future financial goals.
- Credit Score Maintenance: Maintain a healthy credit score with consistent on-time payments.
Potential Drawbacks to Consider:
- Prepayment Penalties: Some lenders may impose prepayment penalties, negating the potential savings.
- Third-Party Fees: Using third-party services for biweekly payments may incur additional fees.
- Prioritizing Other Goals: Diverting funds to biweekly payments may impact other financial goals.
- Initial Double Payment: In some cases, you might need to make both your final monthly payment and your first biweekly payment in the same month.
Setting Up Biweekly Payments:
- Lender Permission: Ensure your lender permits biweekly payments and confirm their policy on applying extra payments to the principal.
- Direct Communication: Clearly instruct your lender to apply the extra payments to the principal, not the interest.
- Avoid Prepayment Penalties: Choose a lender that doesn’t impose prepayment penalties.
DIY Biweekly Payments:
- No Fees, No Fuss: Save on third-party fees by setting up your own biweekly payment plan.
- Simple Steps: Divide your monthly payment by 12, save the amount each month, and make one extra principal-only payment at year-end.
Alternatives to Biweekly Payments:
- Extra Monthly Payments: Allocate extra funds towards the principal each month.
- Refinancing with Lower Rate: Refinance your mortgage for a lower rate and continue making your previous payment amount, effectively paying more towards the principal.
- Round Up Payments: Round up your monthly payment to the nearest hundred and apply the difference to the principal.
- Utilize Bonuses or Tax Refunds: Apply any extra income towards your mortgage principal.
Frequently Asked Questions:
1. What’s the difference between biweekly, bimonthly, and semimonthly payments?
- Biweekly: Payments every two weeks (26 payments per year).
- Bimonthly/Semimonthly: Payments twice a month (24 payments per year).
2. Do all mortgage companies allow biweekly payments?
No, not all lenders do. Contact your lender to confirm their policy.
3. Where can I find a biweekly mortgage payment calculator?
LendingTree’s mortgage calculator offers this feature.
4. What happens if I make biweekly mortgage payments?
You could reduce your loan principal faster, potentially paying off your mortgage early and saving on interest.
5. Can I set up biweekly payments myself?
Yes, you can set up your own plan without involving your lender or third-party services.
6. What are the benefits of biweekly payments?
Faster payoff, lower interest, easier budgeting, faster equity building, and credit score maintenance.
7. What are the potential drawbacks of biweekly payments?
Prepayment penalties, third-party fees, diverting funds from other goals, and initial double payment.
8. What are some alternatives to biweekly payments?
Extra monthly payments, refinancing with a lower rate, rounding up payments, and utilizing bonuses or tax refunds.
9. How can I set up biweekly payments with my lender?
Contact your lender, confirm their policy, and specify that extra payments go towards the principal.
10. How can I set up biweekly payments myself?
Divide your monthly payment by 12, save the amount each month, and make one extra principal-only payment at year-end.
Embrace the Power of Biweekly Payments:
Biweekly payments offer a powerful tool to accelerate your mortgage payoff and save thousands on interest. By carefully considering the pros and cons, choosing the right approach, and setting up a plan that aligns with your financial goals, you can unlock the door to faster homeownership and financial freedom.
Disadvantages of biweekly mortgage payments
There are disadvantages to switching to biweekly mortgage payments in addition to the many advantages.
- Facing potential prepayment penalties. It’s possible that your loan agreement has a prepayment penalty clause from your lender that says you will be charged a fee if you pay off your mortgage early. Any savings you would have from moving to biweekly mortgage payments might be outweighed by this charge.
- Paying third-party service fees. If you use a third-party service to set up your payments, there might be costs associated with paying every two weeks. The possible savings you might realize by moving from monthly to biweekly payments may be offset by these fees.
- Cutting off other priorities. Applying that extra payment to your mortgage may not seem like much, but it could prevent you from saving more for retirement or other impending costs like college tuition or the purchase of a new car. Additionally, paying off high-interest debt before attempting to pay off your mortgage early will probably make more sense.
- Dealing with an expensive first month. If you decide to switch to a new payment schedule, you might need to pay your new biweekly payments as well as your final monthly payment in the same month in order to continue on the biweekly plan.
How to set up your own biweekly payments schedule
You can take care of the fees associated with switching to a biweekly payment schedule on your own, without consulting the lender or any other third parties. Here’s how:
Step 1Divide your monthly payment by 12.
Step 2Put that much money in a savings account each month and continue making your monthly payments normally.
Step 3Use the money you saved to make one additional full principal-only payment at the end of the year.
Then, without having to enroll in a special payment plan, you will have made the equivalent of thirteen monthly payments.