Do bi-weekly payments make sense?
If you have or have had a mortgage loan you've probably heard about bi-weekly payments, and maybe wondered "do bi-weekly payments make sense?". The simple answer to this question is YES...and NO. Glad I could clear that up.
The fact is bi-weekly payments can save you money. When you make bi-weekly payments you end up making 13 mortgage payments per year (52 weeks, bi-weekly = 26 payments, or 13 months worth), and doing this from day 1 of your mortgage loan will shave nearly 3 years off of a 30 year loan.
So what's the downside?
Well, to start, it's tougher to maintain that bi-weekly payment schedule in your budget if cash is tight, but the real problem is the way bi-weekly payments are paid/held/applied. Typically, banks refer anyone looking to set up a bi-weekly payment to a 3rd party provider or a department that will gladly accept your bi-weekly payments and distribute them to your mortgage loan...for a fee. This fee is sometimes several hundred dollars, and sometimes it's a small monthly fee (I've seen it as low as $6/month).
The issue is these 3rd party fees eat into your savings, AND it adds another party that's handling your money. What if the 3rd party screws up and your payment to your lender is delayed? There's a late fee to add to the mix. 3rd party bi-weekly servicers are little more than scams delivered under the guise of providing a service to you.
So what's a home owner to do?
I advise my clients to avoid their lenders bi-weekly program, and instead do one of the following to accomplish the same financial benefit.
1) Pay extra each month & tell the bank to apply the extra funds to your loans principal balance. To figure out the proper amount to send, divide your principal & interest payment by 12, and that's the amount you'd need to pay extra each month to get the same result as a bi-weekly payment plan.
For example, if your principal & interest payment is $1000/month : $1000 divided by 12 = $83. Send the bank $1083 each month & you'll see the same savings as bi-weekly payments (IMPORTANT: tell the bank you want that extra money applied to your loan's principal.
2) Make one extra principal/interest payment per year. This is in exactly what the bi-weekly program does, but you can do it yourself without a 3rd party or the hassle of making 2 payments each month. In the example above, you'd simply send in an extra $1000 once each year. If you get a sizeable tax return each year, that's a good time to make the extra payment so you don't miss the extra money too much.
Bi-weekly payments are one of many good options to save money by reducing the total amount of interest you pay on a mortgage, but it's important to know how they work. If there are fees or 3rd parties involved, you'll be better served by going with one of the 2 options noted above.
Need a mortgage banker that's working to keep more money in your pocket? Give me a call at 484.680.4852 or ask an expert how you can save more money with your mortgage.
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