biweekly mortgage payment
This may be a dumb quesiton–chalk it up to being green (first-time home buyer). Anyway, I received a letter from my bank saying that I would save tons of interest and shave years off of my loan simply by paying my mortgage biweekly. Is this right? How can getting half of a payment every two…
This may be a dumb quesiton–chalk it up to being green (first-time home buyer). Anyway, I received a letter from my bank saying that I would save tons of interest and shave years off of my loan simply by paying my mortgage biweekly. Is this right? How can getting half of a payment every two weeks instead of a full payment every month be worth that much? I had intended to pay once a month and add 1/12 of a mortgage payment. Should I be paying twice a month and adding 1/24?
Hey Cantafford Carroll…everybody’s right. You CAN save a bundle on interest if you do pay biweekly. However, I’m going to say be more strategic than the bank wants you to be.
You’ll probably notice if you look over the documents that the bank sent you with this offer, that they’ll set it up for $INSERT FIGURE and charge $15 month for the service. If you just look at the MONTHLY charge, that’s about $200/year for something YOU CAN DO FOR FREE.
Very few residential mortgages have prepayment penalties. Simply add the “extra principal” you can afford each month…most mortgages bills have a line specifically for that, or make one additional payment each year, and you’ll reap the benefits without them getting $2000 of your money to set it up. The beauty of DIY in this case, is that if there is a month/year when you can’t swing it, you don’t have to. By all means pay extra on your principal, when you can, but don’t pay somebody for the convenience of setting up the statements for you.
looses? duh…I meant loses.
The problem with a 15 or 20 yr. mortgage is that once you lock it in that’s it, your stuck. In making extra payments on a 30 yr. mortgage you have better flexibility. Say one of you looses you job you can always revert back to the regular monthly payment to alleviate some of the burden. You can’t do that with a 15 or 20 yr. mortgage. Unless you have huge cash reserves in case of emergency that’s a scary prospect.
We’ve also added an additional payment per year on top of our bi-weekly payments by dividing one full mortgage payment by 26 and adding that (pretty nominal) amount to the bi-weekly payments. In doing so it’s projected that we’ll pay off our 30 yr fixed mortgage in 21yrs. saving just under 100K in interest. An example is shown below:
If the monthly mortgage payment is $3,000/mo. that $36,000 a year. If you add one extra payment a year AND scheduled your payments bi-weekly instead of monthly you’d knock off an additional $6,250 from your principle every year. My napkin math is below.
$3,000/12mo. = $250
$3,000 + $250 = $3,250 (to make the one extra payment a year)
$3,250/2 = $1,625 (paid bi-weekly)
$1,625 x 26wks. = $42,250/yr.
vs.
$3,000 x 12/mo. = $36,000/yr.
$42,250 – $36,000 = $6,250.58 (additional off the principle each year)
If you can swing the extra cash every two weeks it sure makes a huge difference over the long run.
It is a forced extra payment and I THINK that if you can swing this, you’re better off with a 15 yr mortgage assuming the difference in interest rate is favorable. There should be an online calculator to help you figure it out. Of course, the 30 year with extra payment gives you more flexibility — you could go back to the 12 payments if your financial picture changes, etc.
As everyone says above- it’s really just a forced extra payment per year, and also the bank gets a better deal on float during the month because they get half the payment sooner each month. You will typically (but not always) get a better rate on your loan for doing it this way.
Several years ago I had taken out a 30 year mortgage paying monthly. Then I also heard that if I make one extra payment a year I would have a tremendous savings on the principle. I contacted Wells Fargo who informed me that in doing so I would have pay-off reduced by 8 years and a savings of over $50,000. I jumped at the chance.
Adam Dahill…where are you?
When I took out the mortgage on my house several years ago I got a 20 year mortgage and it was a requirement that it be paid bi-weekly (or twice a month, actually can’t remember which). The effect was that the anticipated time before pay-off reduced from 20 years to 16 years or so. I refinanced with the same bank about 5 or 6 years ago when rates got lower without taking out any equity and now the payments are the usual once per month but I got a 10 year mortgage to maintain the pay-off date that had been established originally. I have no idea whether bi-weekly has a more beneficial effect than making an extra payment each year.