Posted on April 5, 2013 - 10:10 AM
by Eastern Sierra Realty
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 In typical situations, lenders require you to have payments automatically withdrawn from your bank account since they dislike processing checks every two weeks.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!