Many people dream of living a debt-free life. If you have a mortgage, you can reach your debt-free goal faster by making biweekly mortgage payments.
Doing this reduces mortgage interest and allows you to pay off the hefty loan in a shorter amount of time.
Before you begin making biweekly mortgage payments, consider the consequences.
Most mortgages involve one monthly payment over the course of 10, 15, 20, or 30 years. Some people choose to have adjustable-rate mortgages, so their payments change based on interest rates.
Some homeowners lock into a rate, so their payments do not change over the course of the mortgage.
Paying the Loan Faster
If you are making 12 payments per year and then switch to biweekly payments, you are technically making an extra payment each year. With 52 weeks in a year, biweekly payments work out to 26 payments.
Doing this reduces the interest you would typically pay in a calendar year. For example, if you have a $200,000 30-year fixed mortgage with a 4% interest rate, you would pay over $143,000 in interest, making one payment per month.
But, when you make biweekly payments, you would pay around $120,000 in interest. Over the course of the 30-year loan, you save more than $20,000. You would also pay off the loan in 25 years rather than 30.
The secret benefit of making biweekly mortgage payments is that 13th payment. When you budget for 26 biweekly payments, you make that extra payment without noticing.
Consider if you made that thirteenth payment all at once. It might hurt financially, but budgeting it into the biweekly payments becomes comfortable.
Reasons to Make Biweekly Mortgage Payments
Along with paying less interest and paying off your mortgage faster, making biweekly payments helps you reduce your private mortgage insurance payments (PMI).
Many first-time homebuyers end up with PMI factored into their loans because they made a 10% down payment rather than the conventional 20%. To protect themselves, lenders charge a PMI penalty to cover the lower down payment amount.
When you pay off more of the principal and interest, lenders remove the PMI faster, too. As soon as you own 20% of your home’s equity, you can ask your lender to remove the PMI payment.
If you want to pay your mortgage faster, apply the amount you paid to the PMI to the interest or principal. Adding that extra amount to your biweekly mortgage payment speeds up the payoff. Since you were already paying it, you don’t have to redo your budget.
Paying small biweekly amounts is easy to budget. If your monthly mortgage amount is $1500, paying $750 every other week reduces the stress of paying the large sum all at once.
When you make automatic payments, you don’t even think about writing the check or sending a big lump sum to your lender.
When you pay off your loan early, you put more money in your pocket. If you reduce your mortgage term by five years, you save thousands of dollars. You can use that money into investment accounts or pay for your children’s college tuition.
Paying off a large loan also gives you more financial freedom and reduces your financial stress.
Some people choose not to pay their loans early because they would rather invest the extra payment. They use the argument that they earn more interest than they save. Consider that homes are investments, too.
Owning your home outright makes it a valuable asset in your portfolio. According to Zillow, home prices tend to increase by 3 to 5 percent annually.
Market fluctuations and regional issues affect home prices. For many homeowners, their homes are their most valuable investment. By making biweekly mortgage payments, they can enjoy owning their homes and no longer owning a lender.
Talk to your financial advisor about where you should put your money. Your financial advisor can show you the benefits of investing or paying off your mortgage loan. Your financial advisor will look at your financial situation and help you determine what is best for your retirement goals.
Beware of Extra Service Fees
Making biweekly mortgage payments might sound like an easy thing to do. In actuality, it is. But, some companies exist that try to make money off of your financial prudence.
Payment processing companies like to take advantage of mortgage holders who want to remake their payment schedules. Beware of payment processing companies that ask for setup fees to arrange your biweekly payments.
Some processing companies take a finance charge for sending your payments. Another procedure includes holding checks until the full payment is due. Companies that do this negate the whole idea of paying off a mortgage early.
Before you begin making biweekly payments, chat with someone from your mortgage company to be sure you can make payments without having to pay extra fees.
Many mortgage companies are happy to have customers pay more than their scheduled payments. Some do not. They prefer you pay what is on your coupon so they can reap all 30 years of interest.
Some mortgage lenders attach prepayment penalties to their loans. Lenders make money off of the interest from their customers’ loans. If customers pay them off before the end of the term, the lender does earn all the expected interest.
Prepayment penalties discourage borrowers from paying off their loans early. Fortunately, not all loans have prepayment penalties. Some prepayment penalties only apply to mortgages that buyers pay off a few years after closing on the home.
Most prepayment penalties apply to paying off a large part of the loan. To protect your finances, check your mortgage paperwork to see if you might have to pay prepayment penalties.
Making Your Own Payments
Today’s online banking services allow customers to make easy online payments.
If your bank has automatic payment services, you can set up your biweekly mortgage payment for free. Before you do this, be sure your bank does not charge you for using the service. Also, be sure your mortgage company will accept the biweekly payments.
If you get a yes from your mortgage company, set up two automatic payments that post before your original monthly payment’s due date. For example, if your monthly payment is due on the 20th, make your payments on the 1st and the 15th.
When you make the extra payments, tell your lender where you want the extra money to go.
Some lenders put the money toward the next payment, so tell them you want it to go to the loan principal. Applying money to the principal shrinks your loan faster. Check your lender to ensure that the payment is going to principal.
Potential Problems with Early Payoffs
Some homeowners refuse to make extra payments because they do not want to lose out on the benefits of having the loan.
Homeowners can sometimes deduct all the interest they pay on their mortgages, up to certain limits. Once you pay off your mortgage, you lose that deduction. Some homeowners find that the deducted interest puts them into a lower tax bracket, thus increasing their annual tax refunds.
Delaying Retirement Investments
Another potential issue with early payoffs is missing out on retirement money.
Paying off a mortgage with biweekly payments takes away from money you could have put in your retirement account. The thirteenth payment could be pretax money going into your 401(k) or other retirement money.
Over the past 90 years, people who invested in the S&P 500 Stock Market earned an almost guaranteed 10% annual interest on their investments. Considering that mortgage rates are around 4.5%, the math is simple.
Historically, people made more money investing than they saved by making early loan payments. Of course, no one can predict how an investment will grow.
Before you begin making biweekly payments, consider if that extra payment benefits you more toward your mortgage or toward your retirement.
If your mortgage interest is low, the extra payment will make more money in a retirement account than it will save you with an early payoff.
Potential Credit Score Issues
An early payoff can cause problems with your credit. Your payment history, loan variety, and credit length affect your credit score.
Mortgages help credit scores, and removing them can hurt the score. While it seems like paying off a mortgage is a good thing, credit scores sometimes see it otherwise.
Losing Out on Escrow Accounts
Once you buy a home, you start making property tax and insurance payments. Many lenders add property taxes and insurance expenses into the monthly payment.
Then, they hold that money in an escrow account until the bills arrive. The lender pays the bills out of the escrow account.
When you pay off your loan early, you lose the opportunity to use the escrow account. Instead, you become responsible for paying those bills when they come to your house.
You have to plan for the hefty property tax bills, which usually come in the summer and winter. They can be thousands of dollars, and you have to pay them on time.
FAQs about Mortgages
What Is A Mortgage ?
A mortgage is a loan that you take out to purchase or maintain your home or other form of property. It’s a regular payment over time, which you agree to pay back to the lender.
Is A Mortgage Debt ?
Mortgages are a form of good debt. When most people buy a home, they use it all the time. They also hope that its value will increase over time. People will often use this good form of debt to qualify for home improvements, use it to pay off credit cards, and as leverage for small business loans.