How the homeowner makes their mortgage payments can save a lot of money over the life of the loan. Tens of thousands of dollars can be saved by making bi-weekly mortgage payments and enables the homeowner to pay off the mortgage almost eight years early with a savings of 23% of 30% of total interest costs.
With the bi-weekly mortgage plan each year, one additional mortgage payment is made. That extra payment goes toward the principal of the loan. Since the homeowner is reducing the amount of the loan balance quicker, they are also reducing the amount of interest charged over the life of the loan.
Here’s an example:
A 30 year mortgage for $100,000 at a rate of 6.5% means the homeowner will pay $127,544 in interest throughout the life of the loan. This also includes a $100,000 principal for a grand total of $227,544. Paying one-half of the regular monthly mortgage bi-weekly makes the interest $97,215, which is a savings of $30,329. The homeowner would have to earn over $42,000 before taxes in order to net that much money.
In order for the homeowner to build equity in their home at a faster pace, the homeowner must have a lender that will credit half of the monthly payment immediately. If the lender waits until the next payment has been received before crediting it to the loan's principal, the homeowner will not see the full benefit. Many lenders decide to hold partial payments in an account until the rest of it is received. This is the case in which the homeowner will not benefit from half payments.
Many companies will make the offer to convert a mortgage to a bi-weekly payment plan with a fee. The lender will automatically withdraw the payments from the homeowner’s bank account every two weeks. It is important to read the small print associated with this. Many of them only pay the lender once every month, so that extra payment doesn’t get applied to the loan until the end of the year. In the meantime, the company earns interest on the homeowner’s money in addition to charging the homeowner a fee that can seem high at times.
The bi-monthly mortgage can be something to watch out for because it is not the same as the bi-weekly mortgage. A bi-monthly mortgage does not have the same results as a bi-weekly one because the homeowner pays half of the monthly mortgage twice instead of every two weeks. This means an extra payment is not made. There is a difference between saving only a single month’s interest instead of seven year’s interest.
If you have built up sizeable savings then applying a portion of your savings to your mortgage will permanently lower your interest cost by lowering the principal balance you are charged interest on. If your loan was made during a period of higher mortgage rates, it might also make sense to refinance your loan at a lower rate & perhaps over a shorter duration of time. The following table highlights local rate information.
If the lender does not offer a bi-weekly program and the homeowner is interested in paying the loan off early, a bank account can be opened and arrangements made for the mortgage payment to come out every month in two bi-weekly payments. At the end of the year, the homeowner can write a check on the account for an amount that is the same as the monthly payment and sent into the lender.
There is also another simple method that is used for prepaying a mortgage. All that has to be done is add an extra amount that is equal to 1/12 of the monthly payment to each payment and the loan will be paid off earlier than standard bi-weekly payments.
There are what is called intermediary companies that can set up bi-weekly mortgage payments for the homeowner. The homeowner’s checking account is debited every other week for the bi-weekly amount, and then the homeowner can send a regular monthly payment to the lender once per year. These intermediary companies will charge a fee to make that extra payment and the fee can be rather large.
There is absolutely no reason to pay a fee for a task that a person can perform on their own using the “do-it-yourself” method that was explained earlier. If the intermediary becomes bankrupt and doesn’t make the payments, the lender will not care if it wasn’t t the homeowner’s fault. It is the homeowner’s responsibility to make payments on time, even if a third party is the one making them for the homeowner.
No matter how the homeowner does it, making extra payments each year can significantly reduce the amount of interest that the homeowner will pay on their home loan.
It is a great idea to take a little time to play with the numbers by using online calculators to check how much will be saved by making bi-weekly payments.
Here are some things that a bi-weekly mortgage schedule can do:
Customers who are knowledgeable should understand what a bi-weekly mortgage program can and cannot do for them. Here are two of the most common misunderstandings:
US 10-year Treasury rates have recently fallen to all-time record lows due to the spread of coronavirus driving a risk off sentiment, with other financial rates falling in tandem. Homeowners who buy or refinance at today's low rates may benefit from recent rate volatility.
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