Owning a home is like having a forced savings account for your money. You are constantly making your monthly mortgage payments and depending on the current market conditions you are building equity, and financial security. What you may not have realized, is that there is an easy way to speed up this process of increasing your equity and subsequent net worth, while still making the same monthly mortgage payment that you have been making all along. Yes that's right, you can pay down your mortgage more efficiently by utilizing a bi-weekly payment schedule for your monthly mortgage bill. A bi-weekly payment involves making half of your mortgage payment twice a month. The bi-weekly arrangement will not lower your compound interest that you are required to pay but it does have several equity building benefits.
How Does the Bi-Weekly Mortgage Payment Work?:
Essentially, you are making an extra payment a year by letting the calender schedule work for you. Since there are 52 weeks in a calendar year you are making half of your monthly mortgage payment 26 times over the course of twelve month period. So if you are making 26 payments over the course of the year, that comes out to 13 monthly mortgage payments for the same amount of money. As a result, you would have made an extra payment a year.
The bi-weekly mortgage schedule is a great way to cut off about 5yrs on your mortgage term and save you tens of thousands of dollars in interest. The larger the loan balance and the higher the interest rate the more in interest you will be able to save.
There are numerous benefits that can result in paying down your principle balance faster that you may not be thinking about at this point in your life but are worth considering.
Benefits of the Bi-Weekly off in the Horizon:
1. College fund- The increased rate of forced savings will lead to more equity and the possibility to pull that equity out of your home for your child's education in the future
2. Retirement- Being able to shave off 5yrs of mortgage payment can make a big difference as to what age you decide to stop working. Imagine starting your fixed income retirement at 60 instead of 65
3. Remodeling- Having paid down your mortgage faster means you may have the opportunity to use some of that equity for the home improvement of your choice later on in life.
4. Emergencies- Life can throw you road blocks that we don't always see coming and sometimes we have to tap into that equity for a financial emergency.
It's amazing how just taking the simple step of setting up a bi-weekly option could have all of these unrealized benefits 10 or 15 years into your mortgage schedule.
Now there can be a couple of down falls. Some banks take advantage of the bi-weekly payment and charge you a set up fee of about $300 and then a monthly fee of $10 depending on the bank. I have yet to find a solid reason why except that they want to make up some of the interest they will loose by having the mortgage paid off earlier. None the less, when you look at the big picture it's not large price to pay to create a faster and larger equity position.
If you are interested in a bi-weekly payment schedule talk to your bank or lender and see if they offer it. If they don't, and not all banks do, try adding a little bit of extra money to your principle every month and watch your mortgage payment begin to benefit you.
It is our responsibility to empower our clients with knowledge to make well informed decisions that can have a dramatic positive impact on their lives. The bi-weekly payment advantage is an easy but over looked tool. Spread the word.