Paying off your mortgage early is a great thing, and you can do it relatively easily and painlessly. You don't need to pay to join a service (sometimes a couple hundred dollars) then pay a continuing fee to have a third party company pay your mortgage payment. You can do this yourself. Bi-weekly mortgage payments work in a general sense, but the pay-services do not.
Your mortgage interest is not calculated daily. It's set up on a monthly basis ahead of time. Paying every 2 weeks does not help lower the amount of interest you pay. In fact, it can actually create issues with servicing your loan. You don't pay your credit card bills, utilities or car payments this way. Your mortgage loan is no different in that sense.
The magic of bi-weekly mortgage payments comes into play simply because you end up paying an extra monthly payment each year directly onto the principal of the loan. This lowers the amount paid over the life of the loan.
Savvy consumers need to understand what bi-weekly mortgage programs will and will not do for them. Here are two common misunderstandings:
Myth No. 1: Paying your mortgage twice a month gives you better credit. Wrong. Some banks and lenders use an automatic bank draft for their bi-weekly plans which means all your mortgage payments will be made on time. And that will certainly help your credit. But you can get the same results using your bank's electronic bill paying service or through an automatic bank draft.
Myth No. 2: Paying twice a month reduces the compound interest on your mortgage. Wrong. In fact, even though you are paying bi-weekly, chances are your loan servicing institution is paying your loan monthly. Which means if you elect to go with this plan, you are actually loaning your mortgage payment - interest free - to your servicing company for at least two weeks every month. What will chop away at your interest are the two additional half-payments going toward the principal each year. In other words, by making 26 payments of half your mortgage, you are in effect making 13 monthly payments instead of the customary 12.
Depending on the terms of your loan -- and who you ask -- one extra payment a year will enable you to pay for your house an average of six to eight years ahead of schedule.
Wondering what your mortgage payments would be if you pay bi-weekly? Check out this bi-weekly calculator available at bankrate.
Five alternatives to paying a service:
- Pay an extra 1/12th of your mortgage payment each month. Divide your monthly payment by 12 and add that to each month, making a note on the check "apply additional to principal."
- Set aside half your mortgage payment each pay period into your savings account. Then pay the mortgage on time. This will help you budget so you have the money. In addition, the extra paycheck you get in those "bonus months" will end up paying an extra payment every year. Keep in mind: do NOT send half-payments into your mortgage bank. This can create some serious problems. Always contact the bank's servicing department with questions about this.
- Get into the practice of using one paycheck for your mortgage payment and the other for your other bills. Quite often, you can move the payment due-date for bills like credit cards and car loans.
- Any time you have a month where you have that third paycheck, apply that to the principal on your mortgage. This will happen twice a year, adding an extra payment to your mortgage loan.
- Sharpen your budgeting skills. If you need help creating a plan to pay your monthly bills and sticking to it, you've got a few different options. You can attend a seminar in your community, pay a service to help with your overall budgeting, or research online resources for free. For example, check out this step-by-step guide on creating a personal budget.
To recap, paying your mortgage payment every two weeks does not reduce the interest accumulating on your loan - that's not how a mortgage loan works. So don't let a service provider tell you that. Instead talk directly to your mortgage bank and ask how they would handle bi-weekly mortgage payments. They'll likely tell you the same thing you've read here.
Paying off your mortgage early is a great idea. But instead of paying a third party servicer, do it yourself and keep your hard-earned money in your pocket. All the money you save when you avoid a bi-weekly mortgage payment service can be put towards paying off that mortgage early!
If you're not yet a homeowner, check out our free guide "Get Mortgage Ready" This free eBook offers tips and advice for becoming a first-time home buyer. Get your copy at the button below.