Monthly Vs Biweekly Mortgage Payments
Buying home is an important milestone and likely the biggest purchase you’ll ever make. Because it’s such a big part of your and your family’s life, it’s important to know all the options available when it comes to paying back your mortgage.
This article looks at how mortgage payments work, how to pay your mortgage and the pros and cons of monthly versus biweekly mortgage payments.
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How To Set Up Your Own Biweekly Payments Schedule
If youre facing fees for getting on a biweekly payments schedule, you can do it yourself without involving the lender or a third party at all. Heres how:
Step 1 Divide your monthly payment by 12.
Step 2 Put that much money in a savings account each month and continue making your monthly payments normally.
Step 3 At the end of the year, make one extra principal-only payment in full with the money you saved.
Then you will have made the equivalent of 13 monthly payments all without needing to get on a special payment plan.
Biweekly Vs Bimonthly Mortgage Payments
Bimonthly mortgage payments could also be an option, but they differ from biweekly payments. Thats because youre making a payment twice per month, which equates to 24 bimonthly payments, or 12 full payments total the same amount of payments as the monthly option. You may get paid bimonthly, and it may be more convenient to arrange your automatic payments around that schedule, but it wont shave time off your mortgage repayment term.
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Benefits Of Paying Your Mortgage More Often
If you can get this system to work for you, not only can you save on interest, but you might also see a bit of a tax break if you claim mortgage interest as a deduction. You should talk to a licensed accountant to see what impact more frequent mortgage payments can have on your tax situation.
And, of course, if you choose to pay every two weeks, you can pay your mortgage off earlier by making an extra full payment per year. Over a 30-year mortgage, thats 30 extra payments, totaling 2.5 years off the end of your loan.
Things To Watch Out For Before Starting Biweekly Payments
Who doesnt love the idea of becoming completely debt-free six, seven or eight years sooner than scheduled? The faster you pay your house off, the more income youll have available to put toward long-term wealth building!
But there are also a few things to keep in mind before you set this up with your lender.
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How The Math Works
If the math is a little tough to follow, it works like this: Biweekly payments are equal to 13 monthly payments in a year where making traditional monthly payments are equal to 12 payments each year.
But do you have to make biweekly payments to do that? You could divide the amount of one month’s payment by 12 and add that amount to your monthly mortgage payment.
If you’re paying $1,500 per month, divide 1,500 by 12 and make your monthly payment $1625. Talk to your mortgage company first to make sure there isn’t something more you have to do to make sure it is applied to the principal amount of your loan.
Drawbacks To Biweekly Payments
One drawback to biweekly mortgage payments is that some lenders may charge fees to enroll in their biweekly payment plan. When it comes to fees, you should crunch the numbers to confirm you’ll still get ahead financially by paying biweekly.
Another factor worth noting is that biweekly payments won’t enhance your credit score. While they won’t negatively affect your score, the credit bureaus use 30-day time frames when they analyze credit data to set ratings. Therefore, you’ll make out the same, credit rating-wise, with monthly or biweekly payments.
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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.
Get A Home Mortgage That Fits Your Budget
One of the biggest mistakes people make when choosing a mortgage is to focus on finding the lowest monthly payment. But the real key to building wealth long term is to focus on the total cost. Heres a clue: We suggest a 15-year fixed-rate conventional loan. And heres another handy guideyoull know you can afford a mortgage if the monthly payments are no more than 25% of your monthly take-home pay.
If youre looking to pay off your mortgage faster, consider refinancing. The right deal could save you a ton of interest and help you pay it off way sooner.
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Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.
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Does Paying Your Mortgage Twice A Month Save Money
Asked by: Prof. Edison Boyle
Tens of thousands of dollars can be saved by making bi-weekly mortgage payments and enables the homeowner to pay off the mortgage almost eight years early with a savings of 23% of 30% of total interest costs. With the bi-weekly mortgage plan each year, one additional mortgage payment is made.
Advantages Of Biweekly Mortgage Payments
Here are some ways biweekly mortgage payments can save you money and hassle:
- Shortening your loan term. Biweekly payments can shorten the time it takes to pay off your mortgage. Since a mortgage payment is often a households largest monthly expense, no longer having one can free up a lot of disposable income and open the door to other financial goals.
- Reducing your interest. Shortening your loan term will reduce how much you pay in interest on the loan. Because the principal balance is decreasing at a faster rate than was planned for in the amortization schedule based on the original loan term, youll pay less interest on that amount, saving you money.
- Simplifying budgeting. You may find it easier to budget your money with biweekly payments, particularly if you get paid every other week from your job.
- Building equity faster. The more you pay toward your mortgage principal, the faster you will build home equity that could be leveraged for future expenses or goals.
- Maintaining your credit. Credit bureaus report payments the same way either on-time or late whether youre paying biweekly or monthly. So you wont have to worry about damaging your credit, as long as you keep up with your payment schedule.
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What Are The Pros And Cons Of Biweekly Mortgage Payments
Pros and Cons of Making Biweekly Mortgage Payments
- Pro 1: Pay Off Your Mortgage Faster. …
- Pro 2: Build Equity. …
- Pro 3: It’s Easier to Budget. …
- Pro 4: You May Save on Interest. …
- Con 1: There May Be a Set-up Fee. …
- Con 2: Requires You to Pay More Over the Course of the Year. …
- Con 3: It’s a Permanent Agreement.
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.
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Make Sure Your Mortgage Company Accepts Biweekly Payments Without Fees
You need to confirm that your lender actually accepts biweekly paymentssome dont. And even if they do, they may charge fees for the option. Never go for that! It defeats the whole purpose of biweekly payments, which is to save yourself money in the long run.
If your lender cant allow you to set up normal biweekly payments without fees, just open a separate bank account dedicated to making your mortgage payment. You can deposit your half-payment amount there every two weeks and use that money to make your full monthly mortgage payment . Now remember: Youll make your mortgage payment every other time you make a deposit. So youll end up with your planned 13 payments by the end of the year, while still following your mortgage companys rules about the timing of the payments. Win-win!
Convenient Online Payment Features
Reduced number of years for your early pay-off date and reduced interest paid depends on loan amount, interest rates, and every two weeks or weekly payment plan start time. These plans will not automatically shorten the loan term of any adjustable-rate mortgage product.
Online Statements require Adobe® Acrobat® PDF reader. The length of time Online Statements are available to view and download varies depending on the product: up to 12 months for auto loans up to 2 years for credit cards, home equity lines of credit, and personal loans and lines of credit and up to 7 years for deposit accounts, home mortgage accounts, and trust and managed investment accounts. The length of time the specific product statements are available online can be found in Wells Fargo Online® in Statements & Documents. Availability may be affected by your mobile carrier’s coverage area. Your mobile carriers message and data rates may apply.
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Why Switch To Biweekly Payments
If you pay your mortgage monthly, like most homeowners, youre making 12 payments a year. When you enroll in a biweekly payment program, youre paying half your monthly amount once every two weeks instead. There are 52 weeks in a year, so this works out to 26 biweekly payments or, in effect, 13 monthly payments.
Because youre making the equivalent of 13 monthly payments each year, youll pay less total interest while lowering your principal balance at a much quicker pace, says Joe Zeibert, senior director of Ally Home, a division of Ally Bank in Charlotte, North Carolina.
Zeibert gives the example of a 30-year fixed loan of $250,000 at a 4% interest rate. Biweekly payments would save a borrower nearly $30,000 in interest charges and have the loan paid off in five fewer years, he says. Even if homeowners stayed in their home for only seven years, they would still save several thousand dollars in interest charges while paying off $10,000 more in principal, which they could then use toward a larger down payment on their next home, Zeibert says.
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Other Ways To Save Money On Your Loan
If you have built up sizeable savings then applying a portion of your savings to your mortgage will permanently lower your interest cost by lowering the principal balance you are charged interest on. If your loan was made during a period of higher mortgage rates, it might also make sense to refinance your loan at a lower rate & perhaps over a shorter duration of time. The following table highlights local rate information.
Disadvantages Of Biweekly Mortgage Payments
Although there are some great benefits of making biweekly mortgage payments, there are drawbacks to making the switch as well.
- Facing potential prepayment penalties. Your lender may have included a prepayment penalty clause in your loan agreement stating you have to pay a fee if the mortgage is paid off early. This fee may exceed any savings you receive from switching to biweekly mortgage payments.
- Paying third-party service fees. If your payments are set up through a third-party service, it may charge you fees to pay biweekly. These fees can cut into the potential savings youd earn by switching from monthly to biweekly payments.
- Cutting off other priorities. While it may not seem like much, applying that extra payment to your mortgage could take away from boosting your retirement savings or paying for other upcoming expenses, such as buying a new car or covering college tuition. And if you have high-interest debt, it will most likely make more sense to pay it off before trying to pay off your mortgage early.
- Dealing with an expensive first month. In some cases, switching to a new payment schedule could mean you have to pay both your final monthly payment and your new biweekly payments within the same month before you can continue on a biweekly plan.
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How Does Paying Your Mortgage Biweekly Work
Interest on mortgage loans is typically calculated on a monthly basis. This means that the lower your principal balance, the lower the interest charged will be.
By paying biweekly, youll reduce your principal balance just a little bit extra, prior to that monthly interest being calculated. These savings will add up month after month, not only reducing your total mortgage interest, but also paying off your loan sooner.
What Are Biweekly Mortgage Payments And Are They A Good Idea
6 Min Read | Aug 30, 2022
Theres something simple you can do to cut years off your mortgage payoff date. Its called making biweekly mortgage payments! Its a smart way to add some speed as you dash out of debt. But before you set up biweekly payments on your mortgage, there are several things you should know. Lets see what they are.
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So What Are The Benefits Of A Biweekly Mortgage Anyway
you can increase the amount of equity in your home at a faster rate you can save money by paying less interest on your mortgage you can reduce the term of your mortgage and own your home sooner your mortgage payments are automated and made simple more frequent payments decrease the outstanding principal loan balance faster
