I got a mailer from Equity Plus that sets up bi-weekly mortgage and pays it all for me. Payment to principle once a year if you have a monthly payment schedule.
Published 10:00 PM EDT Aug 11, 2017
When you buy a home with a mortgage, your payments are due monthly by default. In an effort to pay off their mortgages faster and pay less in interest over the loan’s lifetime, some homeowners choose to make bi-weekly payments instead.
But depending on how your bi-weekly payments are handled, they may not help you make the dent in principal you intend. Here’s what you need to know if you’re considering switching from monthly to bi-weekly payments.
Why switch to bi-weekly payments?
If you pay your mortgage monthly, like most homeowners, you’re making 12 payments a year. When you enroll in a bi-weekly payment program, you’re paying half your monthly amount once every two weeks instead. There are 52 weeks in a year, so this works out to 26 bi-weekly payments — or, in effect, 13 monthly payments.
“Because you’re making the equivalent of 13 monthly payments each year, you’ll pay less total interest while lowering your principal balance at a much quicker pace,” says Joe Zeibert, managing director of Ally Home, a division of Ally Bank in Charlotte, N.C.
Zeibert gives the example of a 30-year fixed loan of $250,000 at a 4% interest rate. “Bi-weekly payments would save a borrower nearly $30,000 in interest charges and have the loan paid off in five fewer years,” he says. Even if homeowners stayed in their home for only seven years, they would still save several thousand dollars in interest charges while paying off $10,000 more in principal, which they could then use toward a larger down payment on their next home, Zeibert says.
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Beware of payment processing companies
Some mortgage lenders offer bi-weekly payment options. For example, Navy Federal Credit Union offers a dedicated program for those who want to make payments every two weeks indefinitely, says Kevin Torres, a mortgage product strategist at the credit union. It also has a free Budget Easy program that lets you make those bi-weekly payments automatically if you want or switch back to monthly payments if your finances change.
Here’s where things get tricky: When lenders don’t offer a bi-weekly payment option, some borrowers turn to third-party services that do. However, these payment processing companies charge a setup fee in the range of $300. Some also charge monthly fees, and it may be hard to get out of the contract once it begins.
Even worse, some of these services simply hold onto your second payment for two weeks and just make monthly payments on your behalf, nullifying the impact of one extra annual payment. So if you get contacted by a company offering to save you thousands by handling your mortgage payments, tread carefully.
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How to do it yourself
The good news is that if your lender doesn’t offer a bi-weekly payment option, you can take matters into your own hands.
Take your monthly mortgage payment and divide it by 12. Make an extra principal-only payment of that amount every month. Or save that amount every month for 12 months in a separate savings account, then make one extra mortgage payment for that year using the total, which is the equivalent of how much extra you would pay annually on a bi-weekly plan.
Before you go this route, however, confirm with your lender that there are no prepayment penalties on your loan and that the extra payments will be applied entirely to your loan’s principal rather than to principal plus interest.
“Bi-weekly payments are certainly worth making if your finances allow for it,” Torres says. You can use a bi-weekly mortgage payment calculator to estimate your potential savings.
The article Should you make biweekly mortgage payments? originally appeared on NerdWallet.
Emily Starbuck Crone is a writer at Nerdwallet. Email: [email protected]. Twitter: @emstarbuck.
Published 10:00 PM EDT Aug 11, 2017
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When you have a mortgage, at some point you may decide to try and pay it off early. One option to consider is a biweekly (every two week) payment plan. With biweekly mortgage payments, you make 26 half-payments a year, which equates to 13 total payments in a year. It can be a good option for those wanting to contribute more money toward a mortgage, without having to commit a large amount of money. However, there are some drawbacks to this method.
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You’ll need to weigh all the factors before deciding whether to commit to biweekly mortgage payments. Lets consider the pros and cons of entering a biweekly mortgage plan.
Pro 1: Pay Off Your Mortgage Faster
By making one extra payment a year, your mortgage will ultimately be paid off faster.
For example, if you’re buying a $100,000 home and you put 20% down, you’ll have an $80,000 mortgage. With a 30-year mortgage, it will normally take you 30 years to pay this off. But if you make biweekly mortgage payments, you will be making what equates to 13 monthly payments each year. Assuming a 6.5% interest rate and biweekly payments of $252, you would pay off your mortgage in a little over 24 years, or about six years early.
Pro 2: Build Equity
One of the reasons why homeownership is so attractive to so many people is that it allows you to build equity. Equity is your financial stake in your home. There are a few ways to build equity faster and one of them is making additional mortgage payments. The more you’ve paid toward your mortgage, the more equity in your house you own. By making an extra payment each year, you’ll gain equity more quickly.
Pro 3: It’s Easier to Budget
If you are paid biweekly, then having a biweekly mortgage payment can make it easier to budget. By always having the same amount going toward your mortgage from each paycheck you won’t have to worry about balancing between your two paychecks.
Pro 4: You May Save on Interest
Your lender may allow you to put your extra yearly mortgage payment directly toward your loan’s principal. If this is the case, you’ll be able to pay off the principal faster which means potential savings of thousands of dollars in interest payments over the years. Pro tip: The money you’ve freed up from interest payments can go toward saving for retirement.
Con 1: There May Be a Set-up Fee
Some financial institutions will charge you a set-up fee to participate in a biweekly mortgage payment plan. Additionally, there may be an associated fee for each transaction (mortgage payment). Some banks do offer this service for free, but it’s best to check with the financial institution currently servicing your mortgage.
Con 2: Requires You to Pay More Over the Course of the Year
Making biweekly payments amounts to making one extra monthly payment a year. That is money you may need for something else. So if your budget is already tight, you may not be able to afford the additional drain on your finances.
Con 3: It’s a Permanent Agreement
When you enter a biweekly mortgage payment program, you are making an agreement to make biweekly payments. You cannot switch back and forth month to month. So if you’d rather not make a binding agreement to pay extra, you shouldn’t commit to this type of payment plan.
Con 4: Your Payment Isn’t Applied as You Pay
Even though the payment is withdrawn from your bank account twice a month, it isn’t applied to your mortgage that way. Your mortgage servicer holds the payment and applies it once a full monthly payment is received. The biweekly payment just forces an extra payment at the end of each year. If you’d rather save and contribute that extra payment yourself, you don’t have to change to a biweekly plan. You’ll just have to check your mortgage agreements to ensure you won’t be penalized for paying the loan off early.
![Equity Plus Bi-weekly Program Equity Plus Bi-weekly Program](/uploads/1/2/5/7/125774877/743673725.gif)
Bottom Line
If you want a “set it and forget it” method for paying off your mortgage a little bit early, then a biweekly mortgage program could be a good fit. Keep in mind that nothing is stopping you from making an extra payment on your own each year if you so choose. Sending money to your mortgage lender twice a month is a matter of automation versus setting aside savings separately to pay off your mortgage early.
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