Is Making a Bi-Weekly Mortgage Payment a Good Idea?
The typical arrangement for mortgage holders is for them to pay it off with monthly payments adding up to 12 payments in a year. There is an option though and it is splitting monthly payments into bi-weekly payments. This kind of arrangement is known as a bi-weekly mortgage and it has some benefits. The main advantage is that such an arrangement can save you thousands of dollars by cutting off years off your loan duration.
More payments, more savings
The savings add up from the fact that a year has 52 weeks. With payment being made with every two weeks, a total of 26 payments are made instead of 24 that would have been made with monthly payments. This means that there are two extra payments that are made with a bi-weekly mortgage.
As you make the payments, they are applied to the principle amount owed. This brings the principal amount owed down which brings down the interest owed as future calculations on interest are made on the reducing balance.
To see just how much savings one can make with this option, consider a mortgage of $100,000 that is payable over 30 years with interest payable of 6.5 percent. Total interest adds up to $127,544. Add the principal amount of $100,000 and the total amount payable amounts to $227,544. If this was a bi-weekly mortgage, the total interest payable would be $97,215. This is a saving of a tidy $30,329.
Making the payments
That does make one rush and split their payments into bi-weekly ones. There are some factors to consider. One is whether the lender will accept to make the change and convert your home loan to a bi-weekly mortgage. If there are already arrangements in place for automatic monthly payments, you also need to stop them first.
The other consideration to make is whether a lender will apply the extra payments to the principal amount. Your lender must immediately credit the bi-weekly payments as soon as they are received. If the lender waits until the second bi-weekly payment is made to credit an account, then no savings will be made. It will be the same as making monthly payments.
Another precaution to take is to ensure that one is not penalized for making prepayments on a mortgage. Being penalized for prepaying a mortgage is not very common these days but there are some lenders who do it. It is best to first verify this with a lender. The benefits of a bi-weekly mortgage will be lost if one has to pay penalties.
It is also very important that the bi-weekly payments are made directly to a lender. Be very careful with third parties that offer the service of making the payments on your behalf. For one, some of them are scams. They set themselves up as service providers pr special programs who will be making the payments on your behalf. Most of them do not. They take the money and run. You may get a rude awakening to the truth when you get notices of default of payment when you have faithfully been making the payments every two weeks. In such a scenario, the lender will hold you and not the intermediary company responsible.
Some service providers are genuine and they will submit payments on your behalf. However, they will do so for a fee. Choose to make direct payments so that you can make maximum savings which is the whole idea behind opting for this kind of loan.
Despite the clear advantages of a bi-monthly weekly mortgage, it may not be possible to opt for one for a number of reasons. One is that the lender may require a large amount to be paid for them to convert a monthly repayment loan to one where payments are made every two weeks. This is because they stand to lose what they would have made on interest paid for a monthly payment loan.
It might also be that one may not have the money to make the extra payment every month or to pay the same amount every two weeks. Or perhaps it may be easier for one to make lump payments at the end of the year.
One way to still make savings is to divide the amount to be yearly by 12. Take the amount and add it to the amount to be paid every month, putting it down as a payment towards the principal balance. Check if there is a blank line for this on the loan payment coupon that you have. If there isn't, ask your loan officer how extra payments can be made.
For maximum savings though, the bi-weekly monthly mortgage is the best option compared to other accelerated payment plans. It is advisable to find out from the outset if your lender offers it.
NOTE: AmeriFirst Home Mortgage does not offer a bi-weekly mortgage payment option.
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