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You can reap interest savings and pay off your home loan faster by making extra payments. One way to accomplish this is through a bi-weekly mortgage payment plan. Here is how it works:
Some lenders offer a bi-weekly mortgage payment plan at the inception of the loan. The lender will set-up the payments to be debited from an account of your choosing every 14 days. At the mortgage signing, you will receive an amortization schedule that will reflect the effect of the 14 day payments and provide you with a maturity date that reflects the 14 day payment cycle. Landmark Community Bank offers such a plan for Conventional Mortgages.
If your lender does not offer a bi-weekly mortgage product, they may still allow you to set-up your own bi-weekly mortgage payment plan. You make a payment to your lender every two weeks instead of once a month. Each payment is equal to half of the monthly amount due. Over the course of a year you would have paid the equivalent of 13 full payments versus 12 that you would usually make. Every single dime of this extra payment is applied towards principal, the amount of money borrowed. And since the principal balance is the amount on which interest is calculated, paying down principal translates into a reduction in accrued interest. To illustrate, let’s look at an example:
Making Traditional Payments
If you have a loan balance of $250,000 with a 6 percent interest rate and a 30-year loan term, you would:
- Make monthly principal and interest payments of $1498.88
- Pay total interest of approximately $289,595 over the life of the loan
Making Bi-weekly Payments
Using the same loan balance and terms as above, the difference would be as follows:
- $749.44 paid every two weeks
- About $225,490 paid in total interest
- More than $64,000 in interest savings
- Loan paid off in 24 rather than 30 years
What if you don’t plan to stay in your home for 30, or even 24 years? You may still benefit from taking advantage of a bi-weekly payment option. In fact, you might be surprised at how much bi-weekly payments reduce principal over just a short period of time. For instance, in year one, the difference in principal when making bi-weekly payments is almost $1600. By the time year five ends, the principal amount is about $9000 less than it would be if you were making traditional monthly payments.
Arranging Bi-weekly Payments
Find out if your lender offers a bi-weekly payment program. If so, ask about their requirements for participation. You will typically find that lenders that offer this option require borrowers to have payments automatically debited from their bank account. Some lenders are not inclined to process bi-weekly payments. In addition, they may charge a one-time set-up fee. That fee can range from minimal to hefty, with some lenders charging up to $500.
Weighing Pros and Cons
As you can see, there are definite benefits to making mortgage payments every two weeks. You reduce your total interest burden and shave time off your loan term. But before you commit to taking this route, ask yourself the following:
- Are you willing and able to make a payment every two weeks instead of once a month?
- Is the set-up fee acceptable or prohibitive for you?
- Are you comfortable having payments deducted from your bank account versus writing a check?
- How does the length of time you plan to stay in the home affect potential interest savings?
To get a better idea of how the bi-weekly payment option affects your specific loan, use of the many online calculators designed to show a comparison of this option with traditional monthly payments. Also keep in mind that there are other alternatives that help you accomplish similar results. You can make a lump sum payment of principal annually or periodically include an additional amount to be applied toward principal with your regular monthly payments. So, weigh the pros and cons of each option and then choose what works best for you.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.