Be yourself; Everyone else is already taken.— Oscar Wilde.
There has been a lot of talk going around lately about bi-weekly mortgage payments and how they can help you pay down your mortgage faster. Maybe you heard somewhere that making a payment every two weeks instead of once a month — can help you pay off your loan sooner. This is true, but did you know it has more benefits than just that one?
What are Bi-weekly Mortgage Payments?
When you buy a home from a mortgage lender, you will have monthly payments that are due on a certain date of each month. This is set by default unless you ask for more options. If you split your 12 monthly payments in half you will have 26 payments instead of 12, and half of 26 is 13 so you end up with one extra payment per year. If you apply that to the principle of your loan you can reduce the term of your loan by as much as 5 years.
Does Making Payments Every Two Weeks Help?
When you look at it like this it sure does. Just one extra payment per year can lower your balance. What if you made 2 extra payments per year? That would drop it even lower. Adding just one additional payment could change your mortgage terms from 30 years to 25 years. That really is a big help. And besides that, here are a few more good reasons to use this strategy:
● Pay off the balance faster
● Pay less in interest over time
● Build equity faster
● Easy to deduct from the budget
How Do Bi-weekly payments work?
The strategy itself is simple. You just make one additional payment per year. This can be done a couple of different ways. You can opt for making bi-weekly payments vs a monthly payment if you are just starting your loan process. Many lenders have this option, you may need to call around when doing your research.
Another way is to divide your mortgage payment by 12 months and save that amount per month and submit that amount once per year towards the principle. You can also use your tax return if you want to use it for that. But make sure that your lender applies the payment to the principle. Because if they don’t then that money will just go towards the interest and you won’t get any of the benefits mentioned here.
Don’t Just Send in Extra Payments
In order for this strategy to work, it must be done properly. Some people make the mistake of thinking that they can just divide their monthly payment in half and send it in twice or send additional money on top of their regular monthly payment. I have heard stories of people doing this and then they don’t understand why their balance isn’t coming down. You have to set this up with your lender to do it this way, and they need to understand that the extra payment goes to the principle. Otherwise, all you’re doing is paying the interest and that isn’t going to help you.
What Does This Payment Strategy Work For?
You can use this payment strategy with your mortgage payments if your lender agrees. This works for any home buyer programs, it doesn’t only apply to FHA home loans. A lot of finance companies, banks, and credit unions will allow you to do this for your car payments as well. Always just ask your lender if they participate in bi-weekly mortgage payments, or choose that option if it is offered at the beginning.