Topic o’ the Week: Biweekly Mortgage Payments
If you have the pleasure of owning your own home, your loan servicer probably contacts you all the time trying to get you to change or update your mortgage in some way. Some of these changes may include refinancing your current loan, taking out a home equity line of credit, or converting your loan into a biweekly mortgage. While the thought of changing your mortgage may seem as a major annoyance, it is definitely worth the time to see if any of these changes could benefit you. So let’s get started.
The folks at the bank claim that switching to a biweekly mortgage can cut the total length of your loan by 5 to 7 years, and at the same time save you thousands of dollars in interest. Of course this sounds amazing, but is it TRUE? Is it worth pursuing? Will the Rangers slump after the all-star break? Fortunately for you, the former questions are easier to answer.
Overall, the process of converting your existing loan into a biweekly mortgage works quite simply. In fact, by switching to a biweekly mortgage you aren’t even really changing anything about the terms of your loan, the amount you owe, or any of the stipulations. Basically, instead of paying your mortgage monthly, you pay half your monthly bill biweekly. By paying the bill every other week, you end up making an extra payment each year!
Now I know you probably hate math, but here’s a relatively simple example that shows how the biweekly program could work for you. We will use a nice round number to begin with. For example, let’s go ahead and say that your monthly mortgage payment is $1,000. If you make 12 monthly payments, you will have paid $12,000 at the end of the year. Right?
Well, if you pay biweekly, you will end up making a total of 26 payments each year. So in turn, by paying $500 every other week, you will have paid a total of $13,000 by the end of the year. The end result being that you made one extra payment, which will reduce your unpaid principle balance (and interest charges).
So furthermore, switching to a biweekly payment schedule is an effective way to cut years off of your mortgage. It may not initially seem like very much, but that extra $1,000 a year will eat away at your balance and help you pay it all off early.
Paying down your principle balance is a sound financial move if you can afford it (obviously). In these tough economic times it isn’t always feasible to pay extra each month just to shorten the life of your loan. But is it necessary to sign up for a biweekly payment plan? And why is the bank asking you to sign up to begin with?
You see, there’s a catch. Judging by the notion that nothing on Earth is ever free, most banks have made it where to you have to pay a fee to setup this type of payment schedule. It’s usually somewhere between $200-$500, and some banks will also charge you a monthly processing fee. Other banks will even use a third party company to handle your account if you switch to biweekly. All this just so you can pay more on your loan.
But don’t worry! There is a way around all these arbitrary fees! It is still possible to pay down your mortgage just as quickly without having to deal with the bank or pay them extra each month.
Here’s the scoop: Just take the amount of your monthly mortgage payment and divide it by twelve. Using the example above, $1,000 divided by 12 equals $83.33. Now simply add this amount to your payment each month and make sure to make a note that you want it applied to your principal. Believe me, I worked in the loan servicing industry for years, and they will do whatever it takes to not apply the money to your principle. But anyways…..
By making the 12 payments of $1,083.33, you will have paid off $12,999.96 at the end of the year. Just like that, you’ve gained all of the advantages of the biweekly mortgage without having to pay any fees or service charges! Hooray!
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