Potential Credit Score Issues
An early payoff can cause problems with your credit. Your payment history, loan variety, and credit length affect your credit score.
Mortgages help credit scores, and removing them can hurt the score. While it seems like paying off a mortgage is a good thing, credit scores sometimes see it otherwise.
More Benefits To Paying Bi
- Shortens the term of the loan: Paying bi-weekly means youll get the lower payments of a 30-year term, without the aggressive monthly payment tied to a 15-year mortgage.
- Saves money: The money saved paying bi-weekly may not feel like a lot in the months the third payment hits, but over time the savings in interest could fund a large purchase such as a kitchen renovation, a college tuition payment, or a contribution toward retirement.
- The extra payments go toward the principal: Any extra mortgage payments reduce the principal of the loan, which means each time you make an extra payment you pay less in interest and own a little bit more of your home.
For new homeowners who pay bi-weekly from the start of the loan, they wont even feel the extra payment leaving their bank account each month. For current homeowners, its easy to set-up a bi-weekly payment option even if your lender doesnt offer one.
Simply take your monthly mortgage payment and divide by 12. Using our example, this comes out to $119.33.
One final tip: Paying bi-weekly can have a big impact on how much you pay for your mortgage overall. Its worth it to investigate mortgage options via Credible. Before increasing your payments, ensure your lender doesnt charge any pre-payment penalties or hidden processing fees for the extra payment each month.
What Is A Biweekly Mortgage
A biweekly mortgage is a mortgage product that allows the borrower to make payments every two weeks rather than once a month. A biweekly mortgage means that the borrower is paying every two weeks, or 26 half payments. The result is effectively 13 full payments over a 12-month period, accelerating the payoff of the loan.
The extra payment per year can provide significant savings in total interest over the life of the loan. However, borrowers should consider carefully before signing up for a biweekly mortgage since there can be some disadvantages to these types of payment plans.
The Secret Bonus Of Making Bi
Since there are 52 weeks in a year, 26 bi-weekly payments mean homeowners who pay this way are making 13 monthly payments each year, instead of the standard 12. This equates to just one additional mortgage payment a year, but this one extra payment substantiallyshortens the lifespan of the loan.
A homeowner with a $300,000 loan at a 4 percent interest rate makes one additional monthly payment each year. This shortens payoff on a standard 30-year mortgage by five years and saves over $35,000 in interest over the life of the loan.
Even if you dont plan on staying in the home for 30 years, paying bi-weekly builds more equity in the home since youre paying down more of the principal each time. More equity in the home means a homeowner can take advantage of a home equity loan for large purchases or leverage the equity to get into a larger home down the road.
If the interest rate on your current mortgage loan is higher than these averages, it may make sense to consider a mortgage refinance loan. You can visit Credible to compare rates and lenders in your area.
Youll Pay Your Mortgage Off Faster
So, just how much sooner would you pay off a mortgage with biweekly payments, versus standard monthly payments? Lets look at the math.
There are 52 weeks in a year, which means that with biweekly payments, youll make a total of 26 contributions toward your home mortgage. At the end of the year, that actually equates to 13 full monthly payments versus the 12 you would have made with your standard repayment schedule.
This additional payment each year can significantly reduce your principal balance, meaning that youll pay off your home even faster than planned.
Lets say that you have a $200,000 mortgage loan at a rate of 4.00% for 30 years. If you pay according to your lenders standard amortization schedule, your loan will take you 30 years to repay.
However, by paying biweekly and essentially making one extra monthly payment a year youll actually pay your loan off midway through year 25. Think of all the things you could do being mortgage-free for nearly 5 extra years!
|Standard Repayment Timeline
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The Bottom Line: Are Biweekly Payments Right For You
For the right type of borrower, biweekly payments can help you save on interest and quickly add equity into your home. As with any major financial decision, its important that you weigh the pros and cons of paying your mortgage more frequently.
If you have questions on how you can start biweekly payments through Rocket Mortgage®, you can talk to a Home Loan Expert today for more information.
Make Extra Mortgage Payments
Another way you may be able to save money on interest, while reducing the term of your loan is to make extra mortgage payments. If your lender doesnt charge a penalty for paying off your mortgage early, consider the following early mortgage payoff strategies.
Just remember to inform your lender that your extra payments should be applied to principal, not interest. Otherwise, your lender might apply the payments toward future scheduled monthly payments, which wont save you any money.
Also, try to prepay in the beginning of the loan when interest is the highest. You may not realize it, but the majority of your monthly payment for the first few years goes toward interest, not principal. And interest is compounded, which means that each months interest is determined by the total amount owed .
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Its Easier To Make Extra Payments
Most homeowners recognize the benefit of making extra mortgage payments. However, it can be difficult to actually find the funds to do so over the course of the year.
While this does require you to adjust your monthly budget slightly and ensure that your cash flow is set up to allow for biweekly payments the schedule makes it easier to contribute extra toward your mortgage principal each year.
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Savings Add Up With Bi
Consider a traditional 30-year mortgage of $200,000 with an interest rate of 6.5%. Normally, that would require the homeowner to make a monthly payment of $1,264.14. By using a bi-weekly payment plan, the homeowner would pay $632.07 every two weeks and, in doing so, cut six years of payments off of the mortgage loan and save $58,747 off the total amount of the loan.
“A bi-weekly payment plan is far more effective than merely sending one additional payment per year,” says Michael Hausam, a realtor and mortgage broker in Newport Beach, Calif. “Your loan balance accrues interest every day and reducing that principal balance every 14 days saves more in interest charges than one full additional payment every 12 months, even though the total amount in payments every year remains the same.”
Lisa Orban, an author, and an Illinois-based homeowner has been a regular bi-weekly mortgage payment payer since she purchased her residence and has a good reason for the strategy.
“I pay bi-weekly for a number of reasons, but the primary one is almost immediately more money is put towards the principal rather than the interest,” Orban says. “The payment on the first of the month more goes towards interest, but the payment on the 15th shifts and more money is put towards the mortgage loan principal.”
Less Cash For Other Expenses
Contributing an additional months worth toward your mortgage will result in a faster repayment, but it also means youll have fewer resources to handle the rest of your expenses. If youre already working with a tight budget, biweekly payments could further restrict the amount youre able to put toward your other debts and fixed living costs.
Even if youre not low on resources, biweekly mortgage payments might not make sense for you if that money could be better used on other opportunities. If, for example, you have a low-interest mortgage, you could be better off investing your money into high-return opportunities instead. The key is to determine if the amount you could make will exceed the total you would have saved by paying off your mortgage ahead of schedule.
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How To Change To Biweekly Mortgage Payments
Some lenders have to grant permission before you can switch to biweekly payments. If approved, there are two things to keep in mind. First, your biweekly payments won’t be applied to your account until you’ve reached your full monthly payment amount. Also, during your first month of enrollment, youll likely need to pay both your regular monthly payment plus your two half payments.
Some lenders charge fees to change payment agreements, while others do not. When you talk to your lender, find out if fees are associated with making the switch.
If your lender does not agree to the biweekly payment terms that you propose, simply pay extra every month to get the same benefits. You can also save up and make an extra payment every year, rather than every month. When you make any kind of extra mortgage payment, make sure it’s being applied to your loan principal rather than the interest.
Its important to note that certain mortgages don’t permit early payoffs. When early payoffs aren’t allowed, lenders may charge fees known as prepayment penalties. These fees may equal the amount of interest youre eliminating. If you aren’t sure if your mortgage allows early payoffs, look over your contract or talk to your lender.
Check Your Loan Terms
The mortgage paperwork you signed when you took out your home loan should specify whether your lender will apply partial payments. Some lenders wont accept them at all, and others will hold them until youve sent in enough for a full payment. If your lender is going to handle your payment like that, youll need to use a different strategy, as discussed below.
Another concern you might have is whether your loan has a prepayment penalty. If you took out your loan before January 10, 2014, check your mortgage paperwork or contact your mortgage servicer to find out . If you took out your loan on or after January 10, 2014, your loan probably doesnt have a prepayment penalty. Even if it does, the penalty probably does not apply unless youre repaying the entire mortgage within three years of closing.
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Make One Extra Mortgage Payment Each Year
Making an extra mortgage payment each year could reduce the term of your loan significantly.
The most budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, youll have paid the equivalent of an extra payment by the end of the year.
Should You Pay Off Your Mortgage Faster
The answer to this question depends on the interest rate for your mortgage. In modern times when the pandemic and slowed economy have pushed interest rates so low, its not a bad idea to keep the 30-year mortgage.
One extra payment per year on a $200,000 loan at 2.75% interest only reduces the mortgage by three years and saves $12,000 in total interest.
Taking the monthly payment and investing it conservatively means you earn 4% per year on the investment, which means you gain $21,000 in interest over 30 years which means that by investing you are $9,000 ahead.
Thats a conservative figure on the investment, but everyone must remember that investment carries risk, and gains may not be steady. That being said, a 30-year loan at 2.75% is as close to free money as weve seen in a long time, so any gains on an investment should top that interest rate.
The surest way to reduce total interest is to transform a 30-year loan into 15 years. However, the budget must be able to afford the extra monthly payment.
In order, the considerations should go this way:
The worst, absolute worst, option would be to take money that could be used in important and vital ways and spending it lavishly on belongings and wasteful material goods. Is it worth buying that extra big-screen TV or more expensive car when it comes at the expense of a secure retirement or a year of college for your son or daughter?
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Con : Your Payment Isnt Applied As You Pay
Even though the payment is withdrawn from your bank account twice a month, it isnt applied to your mortgage that way. Your mortgage servicer holds the payment and applies it once a full monthly payment is received. The biweekly payment just forces an extra payment at the end of each year. If youd rather save and contribute that extra payment yourself, you dont have to change to a biweekly plan. Youll just have to check your mortgage agreements to ensure you wont be penalized for paying the loan off early.
Funds Must Be Available For Each Payment
You might also struggle to keep up with biweekly withdrawals if your pay schedule is irregular or if you receive a single, substantial paycheck every month. For these types of earners, it could actually be more difficult to make sure they have all the funds necessary to pay multiple mortgage installments every month.
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Making Biweekly Mortgage Payments
There are some lenders that allow you to automate biweekly payments. This feature makes it easy for you to pay down your mortgage loan faster and for less, without having to even think about the process.
If your lender does not offer such an option, though, youll need to take matters into your own hands. This can be done a handful of different ways heres a look at your three alternatives.
Option 1. You can split your monthly payment in half, logging into your account every two weeks to make a payment. Your savings will be the same as if your lender allows you to schedule biweekly payments.
This option requires you to stay on top of these manual payments, however if you forget to make the second payment one month, you may be charged a late fee by your lender.
Option 2. Automate your regular monthly mortgage payment, taking the legwork out of your lenders requirement. Then, each month you can make an additional principal payment equal to one-twelfth of your monthly amount due at the end of the year, you will have made one extra mortgage payment and significantly reduced your principal balance due.
Option 3. Simply make an additional mortgage payment each year, in the month that works best for you. This one lump payment will go toward reducing your principal balance, though it wont save you as much in interest as if youd made regular contributions throughout the year.
Biweekly Payments Can Save Thousands And Shave Years Off Your Mortgage
Andy Smith is a Certified Financial Planner , licensed realtor and educator with over 35 years of diverse financial management experience. He is an expert on personal finance, corporate finance and real estate and has assisted thousands of clients in meeting their financial goals over his career.
Chances are that if you own a home, youre making monthly mortgage payments. The typical mortgage is structured to make a single payment each month, for 12 payments per year. The good thing about this is it means you pay the same amount at the same time each month, so there are no surprises, and its easier to budget.
But what would happen if you were to split that monthly payment up and make biweekly payments instead? Surprisingly, you could save yourself tens of thousands of dollars in interest charges and achieve mortgage debt freedom sooner. Heres how to make biweekly mortgage payments work for you.
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Lets Look At An Example Of A Do
Loan amount: $200,000Mortgage rate: 4.25% Regular monthly mortgage payment: $983.88 1/12 of that amount: $81.99 New combined payment : $1,065.87
Total savings: $30,205 in interest Mortgage term: 309 months
Be sure that you note the extra amount is to go toward the principal balance!
If you dont make this clear, some lenders will return the surplus money, apply it to your next payment, or perhaps apply it your escrow account. Its important that this is 100% clear so the money goes to the right place.
This free biweekly mortgage method actually works in your favor for several reasons. First, you dont pay any extra junk fees to have someone do it for you.
And second, because you make an extra payment to principal each month, your loan balance is reduced each month and home equity is accrued faster.
This reduces the total amount of interest due throughout the life of the loan. So you pay less interest in a shorter amount of time. Amazing.
Additionally, its easy to execute. Youre still making 12 payments per year, so it doesnt require any extra work like actual biweekly payments.