Why You Should Be Saving Big With Bi-Weekly Mortgage Payments
Sending a check to your mortgage lender every two weeks instead of once a month — through what is known as a bi-weekly mortgage program — could shorten the length of your mortgage and reduce the amount of interest you'd pay over the life of your loan. But is making mortgage payments every two weeks a smart move? Not always.
Mortgage experts say that homeowners need to look at their entire financial picture before deciding whether a bi-weekly mortgage program makes sense for them.
"There is no one-size-fits-all approach here," said Chris Birk, education director with Veterans United Home Loans in Columbia, Missouri. "You can't say that a bi-weekly payment schedule is always the smart decision. Often it is. But for other borrowers, it's not always the best choice."
How it Works
If you sign on to a bi-weekly payment plan through your lender, you'll make mortgage payments every two weeks. Because there are 52 weeks in a year, you'll make 26 payments in a calendar year. If you're good at math, you'll notice that this comes out to an extra month's payment.
When you pay off a mortgage loan in the traditional way, you make 12 payments in a year, or one per month. That would come out to 24 bi-weekly payments. But under a bank's bi-weekly payment plan, remember, you are making 26 — not 24 — bi-weekly payments. Those extra two payments at the end of the year go directly toward reducing your mortgage loan's principal balance.
Say you had a 30-year fixed-rate loan with a balance of $200,000 at an interest rate of 4.4%. If you paid that loan off with traditional once-a-month payments, your monthly payment, not including taxes and insurance, would be $1,001.52. If you took the full 30 years to pay that loan off, you'd pay more than $160,000 in total interest.
If you went with a bi-weekly payment plan, you would pay $500.76 every two weeks — again, not counting taxes and insurance. If you took the full 30 years to pay off your loan, you'd pay just more than $132,000 in total interest. That's a savings in interest of nearly $30,000.
You'd also pay off your mortgage loan in 26 years instead of 30.
It's Not Always the Right Choice
The math shows that bi-weekly mortgage plans work: They do reduce the amount of interest you pay each month while shortening the term of your mortgage.
But that doesn't mean that a bi-weekly plan is always the right choice.
If you plan on living in your home for a short period of time, a bi-weekly mortgage might not make sense. You won't save much in interest if you move out of your home in five years, say.
Bi-weekly plans also mean that you'll be sending more money to your lender each year, too. In our example of a 30-year fixed-rate loan of $200,000 with an interest rate of 4.4%, you'd pay about $1,000 more each year under a bi-weekly plan than you would with a traditional repayment program. That might not seem like much money, but if you're attempting to save for a big purchase — say a child's college education — that $1,000 could come in handy.
Then there's the fact that of all the debt to carry, mortgage debt is usually the most affordable, thanks to the low interest rates that come with it. Homeowners burdened with high interest rate debt, such as credit card debt, should pay more dollars each month toward reducing that debt rather than their mortgage balance.
"If you can financially do it, I am always an advocate of being debt-free," said Rick Roque, managing director of retail with Michigan Mutual in Port Huron, Michigan. "But because mortgage rates are so low, it often doesn't make sense to work so hard to pay off your mortgage debt."
On the flip side, Roque said, by paying off more of your principal balance at a quicker rate, which you would do with a bi-weekly plan, you do gain more access to equity. You can then take out home equity loans to help fund major home improvements or a child's college education.
"You do gain a tremendous amount of financial leverage when you have more equity," Roque said. "You can leverage that equity in your home for emergencies or educational opportunities. That is a powerful tool."
The bottom line? Bi-weekly mortgage plans work. Just consider whether they'll work for your financial needs.
Are you on a bi-weekly payment schedule?
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