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Forget Bi-Weekly Mortgage Payments: Just Pay Extra Principal

iStock-861348156There are several different options to pay off a mortgage more quickly. Bi-weekly mortgage payments can be made or extra principal can be added to the normal monthly mortgage payment.

Check out our Mortgage Loan Options Guide here and learn more about our different loans.

With a bi-weekly plan, half of the mortgage payment is supposed to be made every two weeks.  Because there are 26 bi-weekly payments made each year, one extra payment will be applied to the mortgage each year.  This will usually enable the mortgage to be paid off five to six years early and there will be significant savings on the mortgage interest cost.  If a person is paid twice a month, bi-weekly mortgage payments may be easier to budget for.

However, there is a catch to the bi-weekly plan.  If you can find a lender who offers the service (rare), it will likely charge fees because of the servicing issues that come with it. If you find a third party servicer offering the option, you'll also pay fees. Plus, it's highly unlikely that this service is actually paying the mortgage every 2 weeks because your lender will not accept half-payments. In other words, the bi-weekly mortgage payment service is holding onto your money rather than paying your bill.  Some people may feel the fees are worth it.  However there is a way to accomplish the same thing with no fees whatsoever. It begs the question: Is a bi-weekly mortgage payment service a scam or a legitimate service?

iStock-845922346Extra principal may be added to each monthly mortgage payment.  When a normal monthly mortgage payment is made, it is applied to both interest and principal.   However, when extra principal is added to any mortgage payment, it is applied directly toward the principal amount of the mortgage.  This reduces the amount due on the mortgage as well as reducing the amount of interest that will accrue.  The extra principal can be added to each monthly payment or it can be paid once a year in a lump sum.  To make extra monthly principal payments, simply take the amount of the normal monthly payment, divide it by twelve and add that amount to each of your monthly mortgage payments.

The advantage of paying extra principal versus bi-weekly mortgage payments is slight. The extra principal plan offers more flexibility and lower costs.  There are no fees involved when extra principal is added to a normal monthly mortgage payment.  The extra principal payment plan also offers a little more financial flexibility.  If an unforseen expense or hardship comes up one month, the extra principal payment may be skipped.  Extra money can also be added to the principal payment from bonuses, gifts, savings and extra earnings.  This option would not be available on a bi-weekly mortgage plan.  Either option will enable the mortgage to be paid off sooner and with less interest.  For most people, the easiest and most economical solution is to add extra principal to each monthly mortgage payment.  But either plan will shave significant time and interest off the mortgage.

You can learn more about the home buying and financing world with our eBook, "The  Loan Options Guide ." This free guide covers the options available in today's housing market, so you can decide what's best for you and your family. Get the free guide below.

Loan Options Guide



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Tips for Paying Off Your Mortgage Faster

There are several ways to pay off your mortgage faster and save on interest payments. Even better, not all methods require spending a lot of extra money! Take a look at the list below: Make extra principal payments.  You can pay extra money toward your mortgage balance each month or make a larger, lump sum payment on your principal each year. This reduces the amount due on the mortgage as well as reducing the amount of interest that will accrue. Extra money can also be added to the principal payment from bonuses, gifts, savings and extra earnings. Just remember to make a note on the check for the money to go towards the principal! Make one extra mortgage payment per year. One of the easiest ways to make an extra payment each year is to pay half your mortgage payment every other week instead of paying the full amount once a month, otherwise known as “bi-weekly payments.” 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 adds up to significant interest savings over the duration of a mortgage. You also want to make sure that if your lender accepts this kind of payment they will not charge you a prepayment penalty. Also verify that the bi-weekly payments are being applied to the principal amount and not the interest. Otherwise, you won't notice the savings. Reduce your balance with a lump-sum payment. Have you inherited money, earned a bonus or commission, or sold a large item? You could apply that amount to your mortgage’s principal balance. Another option is 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 principal payment to your mortgage loan. While paying down a large debt is nice, it's not a requirement. Consider making sure you have enough to work toward other financial goals, such as an emergency fund, before paying more on your mortgage. However, there are many options you can explore that best fit your budget. You can learn more about buying your first home with our Get Mortgage Ready Guide below.


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