Your mortgage lender will send you a letter every three months or so. It is meant to encourage him to pay his mortgage every two weeks instead of monthly. The pitch is easy. Deny paying half of your regular mortgage every two weeks. There will be 26 annual payments instead of 24 (12 months x 2). So, you end up making additional payments each year. But why should you? The more you pay the mortgage, the sooner you can get home. That will save you a lot of profit in the long run.
I adore the thought of saving money on interest by early mortgage repayment. If you get paid every other week, this strategy works very well. Budgeting becomes quite simple. But are these offerings everything they seem to be? Read this first if you’re considering switching to a biweekly mortgage plan.
- Don’t buy a game
If you look at the fine print on some of these offers, there is often a huge catch. Some lenders ask for a several hundred-dollar fee to set this up for you. You’ll be paying that upfront, too. It might have made sense in the dark ages of banking — before the internet made creating automatic payments a breeze. But in today’s digital world, there is no reason why you should pay the bank to set up something you can easily do yourself.
You can make the same biweekly plan for free if you pay your mortgage online directly. Add a payment of 1/12 of your regular monthly price to your schedule. Direct delivery will be made to your principal. Once it is set up, you will be paying an extra month yearly for the remainder of the mortgage term.
Here’s something else to consider. No issue if your mortgage was previously set up as a biweekly payment. But if you decide to make a change in the midst.
- Avoid Loopholes
But you must be cautious in this situation. Some creditors will apply any additional payments you make to the subsequent amount. It means you are only making the following payment early and not paying the principal. You still have to pay the interest you believed you were avoiding because of the slight difference.
Because of this, you should consult your bank before setting up this account. Some banks will ask you to specify whether the money should go toward the principal or the monthly installment. If this is the case, you only need to set up two automatic payments—one for the average monthly mortgage payment and a separate, lesser withdrawal for the additional one-twelfth. Make careful to mark the second payment as a principal reduction payment.
Alternatively, you may pay half of your mortgage every time you receive your fortnightly income. You will continue to receive your additional payment after a year. Since you occasionally receive three paychecks, you’ll be sending 1.5 times your usual amount. Doing this means you achieve the same outcome as having your mortgage due every two weeks.
- Avoid Locking Yourself In
If you sign up for a biweekly payment schedule, you must pay every other week. If you want to send payments every two weeks on your own, you can permanently discontinue doing so if your finances change. However, if you and your lender agree on a biweekly payment schedule, you are bound by it. It might be fine if you were paid every two weeks. However, you could need additional flexibility if you have a very tough month financially.
On the other side, being confined to accumulating equity may benefit you. You won’t be able to use the money elsewhere if it is already deducted from your bank account before you can view it for the mortgage. Yes, you do have less money to spend. However, because you will be compelled to live without the extra money currently going toward increasing the value of your home, you will accumulate wealth more quickly.
- A few individual examples
The store owner, who first told me about the two neighbors, is one of them. They used to manage a pretty successful store. The money came quite quickly to them. They were worry-free for a very long time. However, their neighbors had a 9–5 job and had considerably fewer spare cash. The couple, who made two incomes, continued to work hard to advance. They invested every dime they had in a retail center that was (at the time) located in the middle of nowhere. Due to the enormous mortgage, which required them to devote most of their income to debt repayment, they lived like paupers for decades.
For many years, I’m sure it was difficult for them. However, accumulating that equity was very profitable. The 9-to-5 pair is no longer employed a few decades later. They reside in a mansion in the city’s most affluent area with a paid-off shopping center worth more than $20 million. The store owner (who told me the tale) does not in any way reside on the streets. He is still running the store in his 70s to make ends meet. The store owner now gives his former neighbor a monthly rent payment.
If you play your cards well, forcing yourself to accumulate equity could benefit you.
- Fewer Savings Due to Low Rates
Mortgage payments made every two weeks are typically significantly more desirable when interest rates are higher. Consider the situation where you recently obtained a 7% 30-year fixed mortgage. If you start paying your mortgage monthly from the beginning, you can pay off your house in fewer than 24 years. On every $100,000 of principal, you would save almost $33,500 in interest. That sounds like a terrific offer.
On the other hand, biweekly mortgage payments would take more than 26 years to pay off the loan if the identical loan had an interest rate of 3% (which is considerably closer to what most homeowners are currently paying). A careful homeowner would save only about $7,139 in interest for every $100,000 in capital.
Even though biweekly payments are always beneficial, their impact is significantly more significant when interest rates are higher than now.
The Conclusion
You should consider using the benefit of paying your mortgage monthly if you want to pay off your house more quickly. Remember that doing this alone makes more sense than committing to a bank’s payment plan. There is no cost associated with the privilege.
When looking for a new mortgage (or a refinance), carefully consider all your available payment alternatives. You have three payment options: monthly, on the first and fifteenth of each month, or biweekly. Some lenders even provide “accelerated” payment plans where you can add a small amount extra to the principal with each payment.
The additional cash flow that comes with more widely spread mortgage payments may be what you need. Or your main objective is to increase that equity as quickly as feasible. Make the most informed choice by comparing these payment schedules to your monthly spending plan.
