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June 17, 2013
Bi-Weekly Mortgage PaymentsYou may have gotten a brochure in the mail or read on the internet about a mortgage offering referred to as a bi-weekly mortgage. This type of mortgage will take your existing monthly mortgage payment and split it into two bi-weekly payments rather than a once monthly payment. So what is the purpose of this and how does it help you save money?

Additional Payments

By making bi-weekly payments rather than a once monthly payment, you will in fact end up making one more full payment throughout the year. The math is simple; take 52 weeks and divide it by two. That equals 26, which is the total number of bi-weekly payments you will be making throughout the year. If divided by two once again, you will see that this equates to 13, or the equivalent of one additional payment that has been applied to your mortgage throughout the course of the year.

The result of making an extra mortgage payment each year can result in a significant savings over the life of the loan. For example, on a $250,000 30-year mortgage at 6.5% interest; making an extra payment each year can total upwards of $70,000 and shorten the term of your mortgage by as much as six years!

Interest Savings

Depending on how your mortgage is structured with your bank, additional payments may be immediately credited to your principle balance, which will reduce future interest obligations and save you on interest as well as shorten the length of your loan.

It is important to find out from your lender if early payments each month get credited to the principle on the mortgage and also how the loan is compounded. If interest is compounded daily, paying bi-weekly can have a huge impact, but if it is only compounded once monthly, you would not see the additional interest savings from this type of payment program.

Setting Up a Bi-Weekly Payment Plan

There are two ways to go about setting up a bi-weekly plan. One is through your lender or a third party who will often times charge an additional fee to structure your payment schedule this way. On the one hand, they will be automatic payments, which can be helpful if you lead a busy life, but on the other hand they typically have fees associated with them and if you get paid twice monthly, a bi-weekly automatic withdrawal can create cash-flow problems.

The other option is to do it yourself.  By taking your monthly payment amount and dividing it by 12, you can determine how much additional principle to add to each half monthly payment and the results will be nearly identical to that of making a bi-weekly payment. It is important to make sure that the additional payments are designated to the principle on the loan, otherwise they may mistakenly apply to the following months mortgage payment instead.

It is always important to look at your overall financial health before you decide that making additional mortgage payments makes the most financial sense for you. If you have higher interest debt that you could be applying additional payments towards, you should consider paying it off first before allocating additional funds to your low interest, tax-deductible mortgage.

If you’re planning to purchaserefinance, or want to learn more about our mortgage rates, simply fill out our Fast Response form or give First Option Mortgage a call at 888-644-1999.  Our experienced mortgage professionals would love to sit down and discuss your needs. We look forward to hearing from you!

 

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