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.
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