Let me first start off by saying … I am in no way shape or form a mortgage lender, or a finance expert – but I came across this information, and just thought I’d share. Now there may be some who are aware of this information, and then some who never knew you could do this, and if you did – you probably hadn’t realized the impact it could have on your overall mortgage picture, and then for others … perhaps just a reminder of what they already knew but hadn’t made the decision to act upon. But in these times, or in any time for that matter, if you have the wherewithal to lessen your debt without cramping your style do read on, and learn the many ways, you can pay your mortgage down saving you both time, and money.
So, what’s the BIG secret you ask?
There is a little-known mortgage payment strategy that could save you thousands of dollars over the life of your loan. Did I get your attention? Paying your mortgage twice per month. Yes, I did say that, but to be perfectly clear … that doesn’t mean you should make your entire monthly payment twice, it just means pay half of the total monthly payment every two weeks.
“This is called making bi-weekly mortgage payments, a strategy where mortgage loan customers pay their mortgage every two weeks, instead of once a month,” Experian says, “The idea is to chop down your mortgage payment more quickly, and in the process, lower the amount of interest you pay on your mortgage overall.”
So how does paying every two weeks cut down on your total amount and save you big time? In short, when you pay monthly, you make 12 payments per year. Pay every two weeks, and you will end up making 13 full payments. And that one extra payment is directed towards the loan’s principal.
“Since the homeowner is reducing the amount of the loan balance quicker, they are also reducing the amount of interest charged over the life of the loan,” said MortgageCalculator.org.
What should you ask your lender
For many, this can be quite confusing. As I always say, we only know what we know now, and we don’t know what we don’t know. So, before you start changing the way you make your mortgage payments, I would suggest you speak with your mortgage holder first. In addiiton, I would recommend you speak with an experienced local lender for additional information and insights … information is power right, so why not? Having said that, getting good sound advice from the experts first before you start making that extra payment, would be wise, as you’ll want to know how that process will look for you and to make sure it’s allowed. Some lenders might not facilitate the process or don’t credit the payment more than one time per month. “Many lenders decide to hold partial payments in an account until the rest of it is received,” said MortgageCalculator.org.
Other companies may allow bi-weekly payments but charge a fee. “Rarely, some lenders will charge you to make biweekly payments, since it’s essentially twice as much work for them to process,” said Magnify Money “If your lender does this, it may be better to stick with your normal monthly payment plan. If you want to make biweekly payments, you can still do so manually for free by setting aside a portion of your paycheck on your own, paying your normal monthly payment, and then submitting an extra payment once per year.”
How much can you save?
This scenario illustrates the type of long-term savings that make bi-weekly payments attractive. “Say, you have a 30-year fixed-rate mortgage for $250,000 with a 4 percent interest rate. Your monthly payment would be about $1,194, and the total interest paid over the life of the loan would be $179,673,” said Bankrate. “In the same scenario, using a biweekly mortgage calculator, your total interest paid over the life of the loan on a biweekly plan is $150,450.40. That means you’d save more than $29,000 and pay off your loan in 25 years instead of 30.
Another alternative
If making a payment every two weeks isn’t feasible, consider a lump sum payment once a year. Maybe you get a Christmas bonus, a merit bonus, or a tax refund. Using this windfall and allocating the equivalent of one mortgage payment would make a huge dent in your principal. “By paying one extra payment of $1,285.33 each year” on a “25-year loan of $250,000 with interest at 3.75%…the loan amortization schedule with extra payments shows that you would repay the loan 2 years and 11 months earlier and save $17,381.35 in interest,” said Interest.com.
Homeowners looking to cut their overall mortgage debt can get the job done more quickly by paying their mortgage every other week.
Savings Add up with Bi-Weekly Payments
Consider a traditional 30-year mortgage of $200,000 with an interest rate of 6.5%. Normally, that would require the homeowner to make a monthly payment of $1,264.14. By using a bi-weekly payment plan, the homeowner would pay $632.07 every two weeks and, in doing so, cut six years of payments off the mortgage loan and save $58,747 off the total amount of the loan.
“A bi-weekly payment plan is far more effective than merely sending one additional payment per year,” says Michael Hausam, a realtor and mortgage broker in Newport Beach, Calif. “Your loan balance accrues interest every day and reducing that principal balance every 14 days (26 half payments per year) saves more in interest charges than one full additional payment every 12 months, even though the total amount in payments every year remains the same.”
Lisa Orban, an author, and an Illinois-based homeowner has been a regular bi-weekly mortgage payment payer since she purchased her residence and has a good reason for the strategy.
“I pay bi-weekly for a number of reasons, but the primary one is almost immediately more money is put towards the principal rather than the interest,” Orban says. “The payment on the first of the month more goes towards interest, but the payment on the 15th shifts and more money is put towards the mortgage loan principal.”
It’s important to note, however, that not all mortgage services allow bi-weekly payments. To find out where you stand, reach out to your lender and ask about your bi-weekly mortgage payment options. If they are permitted, then your lender can walk you through the process of setting up the new payment plan.
Alternatives to Bi-Weekly Mortgage Payments
Bi-weekly mortgage payments aren’t the only way to save money long-term on a home mortgage.
“I like three different scenarios,” says Elisa Meyer, a former real estate agent and personal finance specialist with At Your Pace Online, a digital-based education services provider. “Each can help you save money on your mortgage.”
• Come up with a way (whatever works for you) to set aside the money every two weeks, and then pay that money toward the mortgage each month.
• Use your year-end bonus, tax return, or other “windfall” money to make one extra payment each year.
• Take your monthly mortgage payment, divide it by 12, and add that amount to your monthly automatic payment. You’ll make an extra payment every year.
I don’t know about you, but for many, if you own a home, your mortgage payment is more than likely the highest expense you need to pay on a monthly basis. So, my thought is if there is a way to reduce my balance sooner rather than later could only be a good thing. And even if you are not planning on staying in the home for the long term … nothing lost, because you are paying towards your equity value.
Just having a good understanding of the best “how” for you, and what that looks like for you in your grand scheme financial picture is important. Speak to your current lender to find out what their rules are and what you can do now to start paying down your home mortgage sooner rather than later, saving you time and a lot of money!
Laura
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