Benefits of Bi-Weekly Mortgage Payments
You have probably heard of home owners saving a ton of money and taking years off of their mortgage payments. This article will explain the basics of how it works and give you some tips on how you can build more equity in your home quicker.
First things first…you must verify that your mortgage does not have a pre-payment penalty. Most mortgages do not have any pre-payment penalties, but some loan products (generally for those with credit issues) may have pre-payment fees. Check with your lender about the details about your mortgage. Once that’s out of the way, you can get started building equity faster.
For this example, the basis is a 30 year mortgage of $100,000 at a 6.5% interest rate. Interest for the life of this mortgage would be $127,544. Add this to the principal and the total cost of the loan making traditional monthly payments would be $ 227,544. If we were to make bi-weekly payments, the interest would be $97,215. For a higher mortgage, the saving is much, much more! There are many bi-weekly mortgage payment calculators available to show you how much you can save making bi-weekly mortgage payments.
The example above only works if the lender credits half of the monthly payment upon receipt. Verify that your lender will credit the payment upon receipt. If not then all your hard work will be for nothing. Once this other detail is verified you can focus on making your mortgage payment bi-weekly.
Bi-weekly payments are important because at the end of the year it results in making one extra payment. This extra payment must be applied to the principal on your mortgage in order to reduce your mortgage and increase your equity.
Making bi-weekly payments is not hard, it just takes discipline. If it is too difficult to start making bi-weekly payment right away, you can still benefit.
Here are some ways to help you make that extra mortgage payment during the course of the year:
- Use your bonus from work
- Tax refund
- Pay extra when you have it
If you choose to pay extra, be sure to send a letter instructing the payment to be applied to the principal (instead of going towards the next monthly payment).
Beware of companies that attempt to charge you to pay your mortgage every two weeks. These companies sometimes withdraw payments every two weeks but only make the payment once a month. They also have been known to make money off of your payments. To top it off they charge you a fee!
In summary here’s what you need to do:
- Verify that your mortgage does not have a pre-payment penalty
- The lender credits half of the monthly payment upon receipt
- Check on your lender to make sure the extra payments are being applied to your principal
- Instruct the lender to apply any extra payments to the principal
You can have the benefits of pre-paying your mortgage and we just showed you how it’s possible.