Paying a mortgage loan every two weeks, instead of once per month, can be a big money-saver for homeowners, but only if it’s done right.
So why pay your mortgage bi-weekly instead of monthly? In a word, savings. Potentially big savings.
It’s not rocket science. When you pre-pay the principal on your mortgage loan, you knock down the total cost of your mortgage. The larger the pre-payments, the more you save. Plus, the sooner you begin to pay off your mortgage, the more you’ll save over the long term.
To illustrate, let’s look at some numbers:
We’ll create a scenario where you have the following mortgage terms:
- Mortgage principal balance = $150,000
- Mortgage term = 360 months
- Monthly principal and interest payment = $899.33
- Total interest over life of loan = $173,757
With a bi-weekly payment of $449.67, for example, you’ll reduce the total interest of your home loan to $135,294. Better yet, you’ll pay off your loan in 24 years instead of 30 years.
So what’s the best strategy when using a bi-weekly payment program? These tips can help:
Use your lender. Many bi-weekly mortgage payers make the mistake of using a third-party firm to handle their payments. Big mistake. Such firms charge huge service fees (plus a transaction fee) to handle your account. Then there is the “upfront” fees that most providers charge, which can amount to several hundreds of dollars. Stay away from the third party guys and work with your own lender. The state of Massachusetts provides a good review of third-party mortgage scammers.
Negotiate fees. Chances are your lender will charge you a transaction fee of a few dollars per month. For example, Bank of America (Stock Quote: BAC) charges $4 per bi-weekly transaction payment. Essentially, they’re charging you to use their bi-weekly payment program. Call your lender and ask for the fee to be reduced or removed. If they balk tell them that you’ll just send two checks in per month (or make two payments online) anyway. They’ll likely come around if you have a good payment history with the lender.
Pay upfront. If the bi-weekly strategy doesn’t appeal to you, get the same benefits by paying one extra principal and interest payment at the beginning of each calendar year (plus your original January payment). You may have to save up to do it, but the benefits over 30 years can really cut down the amount of your total mortgage.
Opt for one-note. The bi-weekly, or “one extra yearly payment,” method works best when you intend to be in your house for the long-haul. If you’re a short-timer, you might just get more bang for your buck to take that extra money and invest in a five- or seven-year certificate of deposit.
Past that, no matter how you make those extra payments, you’ll be saving big bucks later by making a small investment now.
That’s what a bi-weekly mortgage payment plan can do for you.
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