How to Pay off Your Mortgage Quicker
Your mortgage is something you have to pay off each month for decades, right? Not so fast. Many homeowners are using a hack to pay off their mortgage quicker and devote more of their income to saving for retirement. Here’s what you need to know about the effectiveness of bi-weekly payments.
Are Bi-Weekly Payments a Good Idea?
You are making twelve payments per year if you are like most homeowners and pay your mortgage monthly. Yet, you are paying half your usual amount every two weeks when you set up a bi-weekly payment program. Since there are about 52 weeks in a year, you end up making 26 bi-weekly payments, which works out to thirteen monthly payments. You will lower your principal balance at a much faster pace while paying less total interest because you are essentially making an extra monthly payment each year.
Managing Director Joe Zeibert at Ally Home breaks it down using an example. If you have a four percent interest rate on a $250K 30-year fixed loan, you will pay the loan off five years faster and save nearly $30K in interest charges by making bi-weekly payments. Even if you are not planning on staying in your home until it is paid off, you can still pay more on the principal and save on interest charges. By building up equity in your home faster, you have the option to reverse mortgage earlier if you wish and release some of the cash for further property investment. These savings can be applied to the down payment on your new home.
Payment Processing Companies May Not Help
Many mortgage lenders allow you to set up a bi-weekly payment plan. However, some borrowers turn to third-party services when their lender does not have this option. You have to be careful with this alternative since processing companies may charge hundreds of dollars to set you up with this service. Worse yet, they may just hold onto your payment and make the monthly payments instead, thus nullifying any gains.
If you do have a lender who refuses to accept bi-weekly payments, you can try a modified plan. Divide your monthly payment amount by twelve. Each month, make an additional principal-only payment of the amount you calculated. Or, you can set the money aside in a savings account and make an extra monthly payment each year. You do need to be careful that your lender does not have prepayment penalties and that the money will go directly to your principal. You can estimate your prospective savings by checking out this bi-weekly payment calculator.