In
most cases, yes! It’s essentially a process by which you make extra
payments on your mortgage. That way, you save interest costs and pay off
the loan faster.
How Does It Work?
You make a payment to your lender every
two weeks instead of once a month. This means that each payment is equal
to half of the monthly amount due. The result – you’re paying the
equivalent of 13 full payments rather than the usual 12.
It gets even better! The full amount of
the extra payment is applied toward the principal. And because the
principal balance is the amount on which interest is calculated, paying
down principal results in a reduction in accrued interest!
Let’s look a traditional payment monthly schedule vs. a bi-weekly schedule so you can see exactly how it works.
Example 1: Traditional monthly payments
Let’s assume you have a loan balance of
$250,000 with a 6 percent interest rate and a 30-year loan term. In this
example, your monthly payments are $1,498.88. So, over the life of the
loan, you’d pay a total interest of about $289,595.
Example 2: Bi-weekly payments
Using the same loan balance and terms described above, the difference would be the following:
• $749.44 paid every two weeks
• About $225,490 paid in total interest
• This results in a savings of more than $64,000 in interest!
• In addition, the loan is paid off in 24 rather than 30 years
Bi-monthly payments are still a good
strategy if you’re an individual who doesn’t plan to keep your house for
24 or 30 years. Why? Because bi-weekly payments still reduce principle,
even over a short period of time.
For example, in the first year, the
principle is reduced by nearly $1,600. And, at the end of the fifth
year, the principle amount has been reduced by about $9,000!
How Do I Arrange Bi-Weekly Payments?
The first task is to contact lenders to find out if they do offer a bi-weekly payment schedule.
If they offer one, ask what the
participation requirements are. In typical situations, lenders require
you to have payments automatically withdrawn from your bank account
since they dislike processing checks every two weeks.
Often, it’s the case that a one-time fee
is charged for this service. The fee can be minimal or be in the
several-hundred-dollar range, depending on the lender.
So, after all these benefits, how can there possibly be disadvantages to bi-weekly mortgage payments?
Well, the first disadvantage relates to a
situation I mentioned above - the lender’s fee is very expensive for
the service provided. In such a case, the costs may outweigh or cut down
your overall savings.
A
second disadvantage occurs when paying bi-weekly is too hard on your
budget. Upfront, you need to make sure that you have the money available
for the increased payments.
The final potential disadvantage relates
to the length of time you plan to stay in your home. That can affect
your overall savings on interest.
I recommend that you weigh the pros and
cons of bi-weekly mortgage payments by using one of the many online
calculators. Just enter your numbers and the calculator will give you a
comparison.
If you’d like the assistance of an expert on the subject, contact us immediately!
