Thursday, August 13, 2015

Should You Make Bi-Weekly Mortgage Payments?

There is one simple and effective way, in theory, to save a lot of money over time on your mortgage: make bi-weekly payments.

Paying your mortgage bi-weekly—that is, making 26 half-payments a year (52 weeks divided by 2) instead of 12 full monthly payments—is like making an extra payment on the principal balance every year.

Over time, that additional payment on principal can add up to substantial savings on interest.

Consider: for a 30-year fixed-rate loan at 4.5 percent interest, you could cut the payoff date down to 25 ½ years and save more than $13,000 in interest for every $100,000 of principal by making regular bi-weekly payments from the beginning of the loan.

Bi-weekly mortgage payments can yield so much savings that there are numerous third-party companies that provide a service of processing regular bi-weekly mortgage payments for homeowners.

Be very wary, however, in signing up for this type of service. It’s possible and may be most beneficial to simply handle the bi-weekly payments yourself, directly to your mortgage-holder.

If you opt to do it yourself, be sure to contact your bank first to find out if they accept bi-weekly payments. Many do not, and if they don’t your bi-weekly half-payments may result in a steep late fee. Banks that do not offer a bi-weekly payment plan will likely hold the first half-payment until the second half-payment is received, then apply the two payments to principal and interest as they would with a single full payment, yielding no advantage.

If you decide to make bi-weekly mortgage payments yourself, be absolutely certain to note that the extra amount resulting from your bi-weekly payments is to be applied to the principal, by either including a note stating that request or using a payment coupon from the bank and writing in the additional principal payment amount on the designated line.

If your bank does not accept bi-weekly payments, you could still jump ahead on the payoff schedule by making a lump sum extra payment periodically (perhaps quarterly or bi-annually), when finances are available. Again, be sure to clearly state that these payments are to be applied to principal.

If you consider working with a bill-paying company to administer your bi-weekly payments, do a thorough examination into the company, the contract, fine print and fee structure.

Most of these companies will charge small monthly fees for providing the payment service and it may not be worth it. Others might charge a hefty up-front fee to sign up for the service.

One such company recently came to my notice. This company charges $181 to enroll their clients in the bi-weekly payment plan, plus $3.50 for every debit they make—in this case, 26 times per year. That monthly fee alone adds up to $91 a year for a service that you could easily manage yourself.

And who needs to pay more fees on their mortgage in addition to those already being paid?

Of course, in order to make bi-weekly payments it has to make sense for your budget. If funds are limited and bi-weekly payments would cause budgetary shortfalls in meeting other living expenses, it makes no sense.

Still, even if that applies to you there are solid debt-management plans—such as the PowerDownDebt system—that can substantially reduce the time it takes to pay off your mortgage and other debt while keeping your monthly budget within your comfort zone—with or without bi-weekly mortgage payments.

For new home buyers or those considering buying property, now may be an advantageous time to consider bi-weekly payments, as interest rates on mortgages are expected to climb at least slightly over the next year or so. Higher interest rates means you save even more by paying off early (as long as there is no early payoff penalties).

In theory, bi-weekly mortgage payments make a lot of sense. Unfortunately, banks treat bi-weekly payments differently and in many cases such a plan will not yield any benefit.

If you are considering implementing bi-weekly mortgage payments, you may want to consult with a debt or credit counselor first, to determine specific benefits and the best way to go about it.

No comments:

Post a Comment