Unless you've paid cash for your home, you have the obligation of paying a mortgage. Most buyers opt for a 30 year mortgage simply to have a manageable monthly payment. But paying the loan off over a 30 year term is costing hundreds of thousands of dollars in interest payments.
One option to consider to reduce the total interest payment is the Biweekly mortgage plan. Using this option, half of the regular monthly payment is made every two weeks. For a total of 26 half monthly payments annually. That is equivalent to 13 monthly payments annually. In essence, you are making an extra payment every year. Making an extra payment every year will result in substantial saving over a period of time. And will reduce the term of your loan.
A Biweekly mortgage plan offers many advantages to the homeowner. The loan is paid off sooner, equity buildup occurs faster and you will save thousands of dollars in interest payments. Of course you could just make one extra payment per year and achieve the same advantages, but most people are not in a position to do this consistently.
Most mortgage companies and banks offer a Biweekly program. Contact your lender and inquire about it.
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I used to recommend this to people until I ran the numbers on my own mortgage and it was actually more advantageous to make the regular payments and have more interest to write off at the end of the year with a nice refund check.
The other option you can consider is to just make an additional all principal payment each year. Say with you tax refund. This way you are paying down the loan directly.
Donna - Interesting because one could pay up to 3 times more than original price of the home over 30 years. The interest deduction helps to reduce the gross income, but the refund amount does not equate to a dollar for dollar amount to the actual interest paid. It's nice to get a some kind of a refund, but in the long run you would have still spent more.
Brenda - Most definitely, that too would help the cause. Very good point.
Derrick, that is only true if you're actually there for 30 years. If you're only in the house on average for 5 years, which is what most people are, getting the tax refund is more than the interest saved. I guess I didn't specify that in the first comment, but it doesn't make sense to pay extra if you're in the house less than a 7-8 year period.
I like betting on the sure thing. Making extra payment in one form or another will always get you ahead. Hoping to make a profit after owning a property for 7-8 years is iffy. Even if I planned to sell in 7-8, I would still do what I could to increase my equity.
I owned a condo for about 4 years. I did the bi-weekly mortgage plan PLUS made extra payments. Most of the time the extra payment was less than $50 per month although a few times I did make $400 per month extra payments. By the time I sold I was on year NINE of my original amortization schedule. That along with a nice remodel done over the 4 years and a healthy market appreciation, allowed me to walk away with a really nice chunk of change for my next down payment.
Great financial tip.......
Great post!!
=-)
Hi Derrick,
Any time a borrower can pay more on the principle, it's a good idea.
Derrick - another good consumer tip, the bi-weekly payment does save a lot in interest and build equity faster. Making additional payment also helps but the mortgage company need to know that the money is to be applied to principal.
Hi Derrick,
Super post and very good information for todays property owners, I know of a few family members who are doing the biweekly thing. Good Luck!!!!!!!!!!
Thank You
Anthony
This is a great idea. I'm doing the same with my school loan to knock it out as soon as possible.
making that 13th payment say from a tax refund has the same effect.
good post though!
Derrick,
I sold the bi-weekly's over 10 years ago when I was at a small bank. They do work and the benefits once the program is fully understood make for a happy consumer.
I do agree with the bi-weekly mortgages and the benefits of paying down the principle is definitely worth it in the long run. Some programs have those clauses that can however nullify that benefit. That is why it is important for a consumer to know the details of their loan and what benefits or drawbacks they may encounter. Great post!
In reference to Donna's comment, sounds like a good way to go and then take the refund check and apply that toward principle on the mortgage - sounds like a win win.
Nice post Derrick - I do this on my own mortgage and it really does make a difference.
I regretted with my previous houses not doing the bi-weekly- I just so hated sending in the mortgage payment once, that twice would be painful. Now that everything can be done online, it sounds like a great way to go- thanks for the reminder. Next time around I'll hit auto pay and forget it...and save big bucks.
Donna - In the example we talk about a 30 year mortgage. But even if one stay only 5 years, with the Biweekly plan, one would have more equity. And that is still an advantage.
Rosario - It definitely helps to increase one's equity faster.
Debbie - Good for you, I am glad it worked out well for you.
Alexander - I feel the same way. Thank you.
Cynthia - Well said. Time is money or in this case over more time is even more money!
Jennifer - That works too.
amazing how that works!
Anthony - This family is making a wise decision
Danielle - Good, of course the concept can be applied to any loan.
Armando - True, as I mentioned...making an extra payment does do the same thing.
Dan - I'm sure you had plenty of success.
Sharon - Most banks offer this plan. They may charge a set-up fee, but it's still worth it.
Donna - That will work as well.
Barbara - So do I, I usually try to practice what I preach...lol
Laurie - Technology does make it easier. For this plan, many banks require automated deductions from an account.
Barbara-Jo & Bill - It works very well.
The truth is, "Bi-weekly payments" in most cases have minimal impact on your mortgage depending on the type of loan you own. True bi-weekly payments are very popular in Europe and other countries but are HATED in the states. Don't believe me? ADJUSTABLE rate mortgages are typically the loans that have true ammortization based on a bi-weekly schedule. I could talk about the math behind this discussion for hours, but the best way to find out more is read: "The Banks Biggest Secret" or "Rich Dad, Poor Dad's: Cashflow Quadrant". World Savings (a product of Wachovia) is known for their "true bi-weekly" program, where every 14 days your loan is recalculated so every payment is towards a declining balance.
Anthony -Thanks for the information. If Wachovia's Bi-Week program also re-calculates payments towards the declining balance that's even better. However, reducing the 30 year term down to about 23 or 22 years is still OK with a standard Bi-Weekly program. And I do plan on looking at your suggested reading material. Once again, thanks for the input.
Anthony is right. A "true bi-weekly" is one that will amortize every 14 days, thus reducing the compound interest bi-weekly. Some companies will tell you they are giving you this program, but only hold the money and apply it at the end of the month. This drastically reduces the effect since it is basically like making an extra priciple payment each month. Remember, compound interest is one of the most powerful forces in the world.