Bi-Weekly Mortgage Payments vs One Big Extra Yearly Payment
A house is one of the best and also most costly personal assets one can acquire. It is therefore only prudent to do everything possible to reduce mortgage costs. One of the best ways to do this is with bi-weekly mortgage payments.
More payments, less interest
With these payments, an extra payment is made so that the total number of payments that one makes adds up to 13 payments in a year rather than the 12 that would have been made with monthly payments. This is because there are 26 two-week periods in one calender year. This is equivalent to one full extra payment every year.
There is sometimes confusion between paying this way and bi-monthly payments which add up to the same 12 full payments a year. With bi-weekly payments, payments are made thrice a month sometimes. For instance, in a 31-day month, payments would be made on 1st, 15th and 29th rather than on 1st and 15th with bi-monthly payments.
The long view
This adds up to significant savings over the duration of a mortgage in terms of the interest payable. For instance, for a mortgage that is attracting an interest rate of 2.90 percent, bi-weekly mortgage payments reduce the duration of a loan by three and a half years. This adds up to quite an amount that would have paid back as interest on the principal amount.
To illustrate with actual figures, consider a mortgage of $200,000 that is being paid over 30 years with an interest rate of 6.5 percent with monthly repayments of $ 1,264.14. If bi-weekly mortgage payments are made, $632.07 would be paid every two weeks. This mortgage will be paid off six years earlier than it would have been with monthly payments. The savings on interest add up to an incredible $ 58,747.11.
Third party payment processors
It is important to note that most lenders do not offer borrowers the option to make bi-weekly mortgage payments directly. Rather, it's a service offered by third parties. They do this because otherwise, the payments would add up to partial payments.
There is a fee charged for lenders to get on the program but the savings are still significant compared to paying monthly payments. There are also some bi-weekly mortgage payments agents who do not charge upfront fees. Instead, they deduct their fee from the savings that borrowers make from the actual savings made when the bi-weekly payments are made. Also, there are agents who offer this payment option on almost any kind of mortgage and not only bi-weekly mortgage payments.
You also want to make sure that if your lender accepts this kind of payments they will not charge you a prepayment penalty. Verify also that the bi-weekly payments are being applied to the principal amount and not the interest. Otherwise, you will not realize the targeted savings.
Immediate account crediting
Ensure also that the payments will be credited with payments made right away so that the amount payable keeps going down. Otherwise, if the amounts are credited monthly, the targeted savings will not be made as the total amount payable will be the same as what would have been paid with monthly payments.
Set it up
Once all these checks are made, it is best to set up automated bi-weekly monthly repayments to avoid missing a single payment. Organize your finances such that the funds will always be available to avoid fees and penalties that will erode the savings you are trying to make. Your sacrifice will be well worth it when you finally own your home free and clear years earlier.
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