When you take out a mortgage, the default payment terms are to pay back a set amount of money each month. Some people choose to make a payment twice a month to reduce the amount of interest that they own over the duration of the loan.
Depending on how your bi-weekly payments are processed by your lender, it might not make as big an impact as you think it will. Below we’ve covered the key points of what you need to know if you want to switch to bi-weekly payments.
Why Would I Want To Switch To Bi-Weekly Payments?
Most homeowners pay their mortgage monthly, which means that you’re making 12 equal payments throughout a year. If you decide to set up a bi-weekly payment program then you’ll pay half the amount every 2 weeks. There are 52 weeks in a year and so this means you’ll make 26 payments.
Because you’re effectively making 13 monthly payments a year that should lower your total interest payable. It will also help pay off the principal balance at a quicker rate than 12 payments a year.
If you take the example of a 30-year fixed loan of $260,000 at a 4.1 % interest rate will save nearly $30,000 in interest charges. By paying bi-weekly you’ll also pay off the loan 5 years quicker than monthly payments. Even if you only stay in your home for 8 years, you’ll still save thousands of dollars. You’ll pay off more interest and pay off just over $10,000 more on the principal payment.
Watch Out For Payment Processors
Many mortgage lenders do offer bi-weekly payment options. Be careful though – when a lender does not offer a bi-weekly payment as a core product, they’ll sometimes turn to third-party processors.
This is where it becomes expensive. Sometimes these payment processing companies charge setup fees of over $300. Some also will charge monthly fees which will add to the cost of your mortgage. These contracts can be difficult to get out of.
Worst case scenario is that these payment processors hold on to your fee for 2 weeks and then make a monthly payment as usual. This benefits them but does not benefit you in any way.
How Can I Set Up Bi-Weekly Payments Myself?
If you lender does not offer a bi-weekly option that you do have an alternative. You can take things into your own hands.
To do this you should take your monthly mortgage payment and divide the total cost by 12. Every month make an overpayment of that amount. If your Linda won’t let you do that, then save up that amount every month and pay this off at the end of each year.
Be careful if following this route because some lenders charge penalties for excess repayments. This would defeat the whole purpose if you’re being charged every time you make an overpayment.
Bi-weekly payments are definitely worth the extra cash. If you can afford it each month. It will help pay off your mortgage quicker and put you in a better financial position.