Still, many homeowners view their mortgage as a financial burden that they want to be rid of – after all, for most people, the mortgage is the biggest debt they carry. In an effort to pay it off faster, some homeowners elect to make bi-weekly mortgage payments. That is, they sign on with their banks to pay half of their mortgage every other week, rather than making one large payment once a month.
I know what you’re thinking: isn’t paying half your mortgage every two weeks exactly the same as making a lump-sum payment once per month. Mathematically, no. The following example illustrates why bi-weekly payments make a big difference:
Let’s say your monthly mortgage payment is $1,500. If you choose to pay it monthly, that means you’ll end up making 12 total payments and end up paying $18,000 per year towards your home loan. But let’s say you decide to make bi-weekly payments. Since there are 52 weeks in a year, you’ll make a payment of $750 every other week, for a total of 26 payments. In this scenario, though, you will have ended up paying $19,500 over the course of the year, which equals a whole extra mortgage payment. Making one extra mortgage payment per year will allow you to pay off a 30-year mortgage nearly 5 years early, which, of course, means that you’ll pay less interest on the loan over the course of its life.
[Mortgage Help: Get your free credit report and see if your credit score is mortgage qualified]
This sounds like a deal, right? I mean, who doesn’t want to be mortgage-free 5 years sooner than expected? Well, don’t get too excited because signing on to a bi-weekly payment schedule with your bank has some drawbacks, such as:
- You’re locked in. When you formally elect to make bi-weekly payments, your bank will be expecting those payments every other week. If you don’t make the more frequent payments on time, your credit score could get dinged.
- Some banks charge a fee for the privilege of making bi-weekly payments; this could eat into the money you’re saving by making the bi-weekly payments in the first place.
- Many people find timing their bi-weekly mortgage payments to their pay schedule to be a hassle.
Before you get too down on the idea of making extra mortgage payments, it’s important to note that you can achieve basically the same effect of bi-weekly payments without all the headaches by doing one of two things: you can simply make an extra mortgage payment once a year on your own or take your mortgage payment, divide it by 12, and add that amount to your regular monthly payment. In either case, you’re chopping away at your mortgage faster but if you find yourself in an emergency and need the extra cash, you’re not compelled to hand over your extra cash to the bank. In other words, you can get the best of both worlds!
If you have a home loan and want to get the mortgage monkey off your back faster, think about using the extra payment strategies outlined above – in 25 years, you’ll thank yourself!