A popular idea to pay off your home mortgage loan sooner, is to switch from a monthly payment, to a bi-weekly payment.
The concept behind the bi-weekly mortgage payment, is that you make half a mortgage payment, once every two weeks, instead of making one full payment per month. This then allows you make 13 full payments per year, instead of 12.
If you start on bi-weekly payments from month one of a 30-year loan, it would allow you to pay off a loan in 26 years and essentially save four years’ worth of payment. However, let’s take a closer look as to whether this is the best option to pay off your home loan sooner.
Does It Work?
The bi-weekly mortgage payment does pay off your loan faster, which saves you interest. However, when making bi-weekly payments, it’s also important to analyze when the additional payment gets applied. Most lenders will hold half payments in a “suspense balance” and not apply the payment until the second half is received, so that 13th payment does not get applied your loan, until the end of the year.
Is There An Option That Might Be Better?
The convenient part about the bi-weekly mortgage payment is that will allow you to automate the payoff of your home loan sooner.
However, if you want to pay one additional payment each year, a slightly more effective way to do so, is to divide the principal and interest portion of your loan by 12 and send in 1/12th of your mortgage payment as an additional principal payment on a monthly basis. This will allow that extra principal payment to post immediately and not at the end of the year.
Yet another even better option is to make one larger lump sum payment at any point in the year, such as when you receive a tax return or at any point you might have excess funds to do so. This will again allow that extra payment to be applied right away, which then increases the effectiveness of every payment you pay from that point forward.
In other words, if you are going to pay an extra $1,500 or $2,000 on your mortgage loan, your better off getting the funds to your loan as soon as possible, as it will have a bigger and quicker impact. The bi-weekly payment setup, delays those eventual extra funds from getting there as soon as possible.
Are There Any Other Things To Consider?
If paying off your home loan sooner is the goal. It also makes sense to make sure you have an interest rate on your loan, that is as advantageous as possible. Even if you are a few years into a home loan, if you can drop your interest rate by .50% or more, you may want to do it. You can then keep making your old payment, but then pay off your loan sooner.
Or if you can afford it, you may want to just consider switching to a 20, 15 or even 10 year fixed loan, which will allow you to pay off your loan sooner, at even lower interest rate.
As always, everyone’s situation is unique and if you are considering options to pay off your home loan sooner, please reach out to a trusted lender, like Strategic Mortgage.
For more information on current home loan programs and options for existing and potential home owners, please contact Bill Kamboukos of Strategic Mortgage at (480) 703-5844 or by emailing: bill@strategicmtgaz.com or online at www.strategicmtgaz.com
Strategic Mortgage, LLC - NMLS#158804- Equal Housing Lender – AZBK#0909514
Vasilios Bill Kamboukos Jr – NMLS#160440
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