AZ Lending Experts LLC

Can Making Bi-Weekly Payments Pay Off Your Mortgage Faster

Posted: 2019-02-22 | Author: Scott Roberts

When someone takes out a home mortgage, the default option is to make their payments monthly. Typically, there is one monthly payment that is due on the first of the month, the 15th of the month, or whatever date is most convenient for the borrower. This payment covers principal and interest due each month, and it often covers property taxes and homeowner’s insurance if the borrower chooses to put those amounts in escrow. So, by default, the average borrower makes 12 mortgage payments each year.

You may have heard about the option of making bi-weekly payments to pay off your mortgage faster. The idea is to pay half of your mortgage payment every two weeks, rather than making one monthly payment. Over the course of the year, this works out to 26 bi-weekly payments, which is equivalent to 13 monthly payments. By doing bi-weekly payments, you are in effect making one extra mortgage payment each year.

How Much can you Save with Bi-Weekly Payments: While it may not seem like a big change in your payment plan, making payments every two weeks can save you a significant amount of money. For example, let’s say you have a $250,000 mortgage at 4% interest on a 30-year fixed rate loan. By making bi-weekly payments, you would save nearly $30,000 in interest over the term of your loan, and your mortgage would be paid off in about 25 years instead of 30. All this can be accomplished without much pain in your monthly budget. In fact, if you are paid every two weeks, you can simply set it up to make a bi-weekly mortgage payment every payday.

Aside from saving thousands of dollars in interest and paying your mortgage off earlier, there are a couple other major benefits to setting up a bi-weekly payment plan:

  • Build Equity Faster: In the first few years of a mortgage, your monthly mortgage payment goes mostly toward interest. And until you are chipping away significantly and your principle mortgage balance, you are not building much equity (other than any gain in market value your home makes over time). The extra payment you make each year on the bi-weekly plan goes straight toward principle, allowing you to build equity much faster.
  • Get Rid of PMI Sooner: Many home borrowers are unable to come up with a 20% down payment. In such cases, they will usually have to pay private mortgage insurance (PMI). PMI does nothing for the borrower, it is there to protect the lender from the borrower defaulting on the mortgage. By building equity faster through bi-weekly payments, you are able to cross the threshold of 20% equity in your home sooner, allowing you to more quickly drop PMI and apply the money you save each month to something much more useful.

A Word of Caution about Bi-Weekly Payments:
Borrowers can realize numerous benefits from making bi-weekly payments, and if you can fit it into your budget, it is highly recommended that you adopt this payment structure. That said, there are a couple things to be careful of. First of all, there are third-party payments processing companies out there that will set you up on bi-weekly payments for a fee. In many cases, you will also have to sign a contract with them. Be very careful about working with this type of provider.

Before even considering this option, find out if your lender has a bi-weekly option already available. Many lenders have this option, and if yours does, there is no need to work with a third-party processor. Just set it up automatically through your lender and you are good to go.

If your lender does not have it bi-weekly payment option, you can still do it yourself manually. Just divide your monthly mortgage payment by 12 and make an extra “principle only” payment each month for that amount. You could also save that amount each month and make an extra “principle only” mortgage payment at the end of the year. Before doing this, however, check with your lender to make sure there are no prepayment penalties, and that extra payments can be applied directly to the principle of the loan, rather than principle plus interest.

Speak with a Local Lending Expert to Discuss Mortgage Options:
If you are looking to buy a home and you want to make sure bi-weekly payments are an option you can take advantage of, it is best to work with and local lending specialist to discuss the loan programs available to you, and to ensure that you are connected with a lender that will allow you to make bi-weekly payments. A local expert can look at everything that is available to you in the area, so you can have access to the best mortgage options to fit your needs.

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