Are Bi-Weekly Mortgage Payments A Good Idea?
Consumers often receive solicitations from companies offering bi-weekly payments. The advertisements promise to reduce the number of years that a consumer will pay for the mortgage. Are bi-weekly payment options a good idea?
For starts, a bi-weekly mortgage payment program is meant to short-circuit your loan’s amortization schedule. Instead of making a monthly payment, a consumer that pays on a bi-weekly payment plan will make half of his regular mortgage payment every two weeks. Each payment on the bi-weekly plan is equal to half of a full mortgage payment. The promise is that a bi-weekly payment will pay off a mortgage in less time than a person who pays once a month.
Here is how the bi-weekly plan pays off the mortgage in less time. With 52 weeks in a year, a borrower on the bi-weekly plan will make 26 total half payments a year. 26 half payments is the equivalent of 13 full payments per year. The bi-weekly person will make the equivalent of 13 mortgage payments every year. Applying the 13th payment to the principal balance will pay down the loan sooner than the borrower that makes only 12 mortgage payments per year. And, this is how a bi-weekly payment plan works. With each “13th payment”, your loan balance is reduced by the entire amount of the payment. You reach your loan’s payoff date sooner. At today’s mortgage rates, bi-weekly payments effectively shorten your loan term by 4 years.
Effective Alternatives to Bi-Weekly Payments
There is no doubt about that bi-weekly payments work. It’s just basic math. So shouldn’t everyone sign up for bi-weekly payment plans?
There are several reasons why homeowners may want to avoid enrolling in a bi-weekly mortgage payment plan. The main reason is that the consumer still needs extra money every year to make the 13th payment. The payment is not “free.” The consumer is paying the bank extra out of his savings. This may not be the right option for everyone’s budget.
Second, the plans often cost money. Consumers can self-manage their own payment reduction plan and not pay a fee. The consumer can make an extra payment on their own anytime and achieve the same result without having to pay a fee to an outside company to manage. This can be done in a variety of ways. The consumer can send one extra payment at the beginning of the year, at the end of the year, or in the middle of the year.
Perhaps the best option is adding 1/12 of your regular mortgage payment to your check each month. For every $1,200 of mortgage payment, add $100 to the monthly payment. By sending $1,300 to your lender monthly, you will “overpay” your mortgage by an amount equal to a 13th payment.
Another reason to skip the bi-weekly mortgage program is that bi-weekly payments are a contract and once that contracts starts, as a homeowner, you’re obligated to make those 13 payments per year no matter what. By contrast, with a self-managed payment plan, you never have that obligation. You can choose to skip a month during the holidays, for example, then double-up on payments later on, or not at all. It’s all in your control.
One final thought – before looking at bi-weekly options, you’ll want to look at your mortgage rate first. With mortgage rates low, your best savings may happen through a refinance. Extra payments can speed up your payoff, but not as well as taking a zero-closing cost refinance, then putting your monthly savings back to your loan balance. Your mortgage payment stays the same, but your loan payoff date shrinks.
We are here to help. If you want to discuss early payoff options, or need help evaluating your interest rate, give us a call!