Bi-weekly mortgage payments: can they save you money, and what are they?
Everyone is anxious to save money where ever they can, and on the surface bi-weekly mortgage payments seem to be a great way to save on mortgage interest. For many the opportunity and ability to save thousands of dollars in mortgage interest is a no-brainer. But how much do you really save?
With a bi-weekly mortgage, payments are made every two weeks. In the end the buyer pays 13 payments instead of 12 per year. Henceforth, a 30-year mortgage will be paid off in 23 to 24 years. On an average you can save $40,000 or more depending on the amount of your mortgage and your interest rate. This sounds great, but looking at the bigger scheme of things can reveal more important issues.
This type of payment schedule isn’t common and the option to convert to a bi-weekly plan is just that, an option. There are usually fees involved to set up this service up. Companies may advertise this service to existing mortgage holders but again it comes with a price. A monthly service fee of $6 to $8 or more per month is common and some companies charge setup fees of $200 or more. Doesn’t sound like much, but essentially it isn’t a service at all because consumers can pay bi-weekly on their own.
Consider sending the equivalent of one twelfth of your current mortgage payment in addition to your regular payment and specify it be applied towards principal each month. Divide your mortgage payment by 12. Add that amount to your monthly payment check, specify ‘additional for principal’ on your check, and over a year you’ll have made an additional payment. The equivalent to paying bi-weekly with less hassle and no special fees.
Another fact to consider is whether or not your money can be more useful in other places. If you haven’t saved enough towards other financial goals, it may be wiser for you to lump that money into a college tuition fund or IRA. Your mortgage interest is tax deductible and in the end, the deductions and credit you’ll receive can reduce your overall mortgage interest rate. Focus your additional monies towards high interest obligations or savings accounts. Credit cards, personal loans or even a second mortgage are better suited for quick repayment than a 30-year conventional mortgage with an interest rate of 7% or less.
If you’re convinced a bi-weekly plan is the way for you the first step is to contact your mortgage company. If this isn’t a service they provide, consider setting up a bank account specifically for paying your mortgage each month. Many banks offer accounts with free bill pay services. This gives you the opportunity to deposit funds on a bi-weekly basis and then have your bank send checks each month to your mortgage company. You’ll want to make sure how your mortgage company will need the additional funds specified on the payment checks. Some will want an additional check cut for any amount over and above the monthly payment, whereas others are content with one check specifying in the memo section how to negotiate the additional funds.
It’s also important, if you are planning on paying this way that you make sure there are no clauses in your mortgage that prevent prepayment for a specific period of time. Some notes will guarantee a minimum amount of interest to the mortgage holder and do not allow for prepayment. Address this fact right away and make sure your note allows for prepayment.
Bi-weekly mortgages are a money saving option for some. People are quick to jump into situations that promise big savings and quick payoffs. Taking a look at your financial ‘big picture’ will help you determine if this is the right payment plan for you.