April 25, 2024

How Often Should You Pay Your Mortgage?

We get a letter from our mortgage company once every three months. The goal is to get us to make biweekly, rather than monthly, mortgage payments. Essentially, the sales pitch is straightforward. Every week, we’d send in what would have been half of our regular mortgage payment. Instead of 24 payments per year (twelve months x 2), you’d have 26. As a result, we’d have to pay a little more than once a year. What would be the point, though? Our mortgage could be paid off faster if we made larger payments. That would end up saving us a ton of money in interest payments.

The prospect of reducing my interest rate and mortgage payment by prepaying excites me. If you are fortunate enough to be paid every other week, this strategy will serve you well. The budgeting process becomes very simple. Is there any truth to the rumors that these deals are so great? If you’re considering switching to a biweekly mortgage payment schedule, here’s what you need to know:

Never put up your own money

The fine print of many of these deals reveals a hefty caveat. Some loan companies will charge you hundreds of dollars to get everything set up. Also, that is an up-front cost. Back in the stone age of banking, before the internet made setting up recurring payments a breeze, this might have made some sense. However, in today’s digital world, there is no reason to pay the bank to set up a service that you can do on your own.

If you pay your mortgage with an online direct payment service, you can set up the same biweekly plan at no cost to you. Make an adjustment to your regular monthly payment of an amount equal to one-twelfth of your regular payment. Your principal will receive it immediately. Doing so allows you to pay an extra month’s worth of principal each year for the duration of your mortgage.

There’s one more thing to keep in mind here. Biweekly payments are fine if that’s how you originally set up your mortgage. But if you need to make a midstream adjustment,

Watch out for caveats

However, caution is required in this situation. Any payments made in excess of the due amount may be applied to the next installment. Therefore, you are not reducing the loan’s principal but rather just making the next payment a little early. The nuance is there, but in the end, you end up paying the interest you were hoping to avoid.

That’s why you should talk to your financial institution before proceeding. If you want to put your payment toward your principal rather than your monthly payment, you may have to tell your bank to do so. If this is the case, you need to only arrange for two automatic payments to be made. There are two withdrawals, the larger one covering the regular mortgage payment and the smaller one covering the additional 1/12. You should specify that the second installment is for the principal.

Another option is to have your mortgage payments automatically deducted from your biweekly paycheck. You will continue to receive your bonus after a year has passed. This is due to the fact that there are months in which you receive three paychecks, resulting in a payment that is 1.5 times the usual amount being sent. If you do this, your mortgage payments will be as frequent as every two weeks.

Don’t get trapped

Signing up for a biweekly payment schedule means you’ll have to make payments every other week. If you are making biweekly payments on your own initiative, you are free to stop whenever you feel it is appropriate. If you sign a biweekly contract with your lender, however, you’ll have to keep making payments at that frequency. If your pay schedule is every two weeks, this might not be an issue. But if you’re having trouble making ends meet in one month, you might need a little leeway.

Locking yourself in to build equity, however, has its advantages. You won’t be able to use the funds for anything else if they are immediately transferred to the mortgage payment. Indeed, your financial resources are tighter. But since you’ll have to cut back on other expenses to make ends meet, you’ll be able to put more money toward your home’s equity and build wealth more quickly.

Personal Illustrations

The proprietor of a local business introduced me to his next-door neighbor and told me their story. You see, in the past, they successfully ran a retail business. Money was not a problem at all for them. For a long time, they had no major concerns. However, most of their neighbors appeared to have much less disposable income because they had 9-to-5 jobs. But that didn’t stop the couple from trying to get ahead on both of their incomes. All their savings went toward purchasing a strip mall in the middle of nowhere. For decades, they remained impoverished as the enormous mortgage consumed the majority of their income.

It had to be difficult for them for a long time. But the time and effort spent accumulating this equity paid off handsomely in the end. A couple of decades later, the 9-to-5ers have retired. They have a fully paid-for shopping center worth over $20 million and a mansion in the most affluent neighborhood in town. It’s not like the shopkeeper (who told me this) is homeless or anything. To make ends meet, however, he is still running the store in his 70s. In fact, the shopkeeper is now officially the landlord of his former next-door neighbor.

If you play your cards right, forcing yourself to build equity can be beneficial.

Low interest rates discourage saving

Interest rates that are higher make biweekly mortgage payments more appealing. Take the case of a 7% 30-year fixed-rate mortgage loan. If you start making biweekly payments on your mortgage right away, you can expect to finish paying it off in under 24 years. More than $33,500 in interest is avoided for every $100,000 borrowed. That’s a fantastic bargain, for sure.

However, if the same loan had an interest rate of 3% (which is closer to what most homeowners are currently paying), paying it off with biweekly mortgage payments would take more than 26 years. In addition, the careful homeowner would only save about $7.139 in interest charges for every $100,000 in principal.

Even though making payments every two weeks is helpful, its impact is magnified when interest rates are high.

In Conclusiveness

Biweekly mortgage payments can help you reach your goal of owning a home free and clear much sooner. Keep in mind that it is in your best interest to handle this on your own rather than commit to a bank’s payment terms. There will be no costs associated with your participation.

When looking for a mortgage, whether it’s your first or you’re refinancing, it’s important to weigh all of your options, including monthly payment amounts and interest rates. You have the option of paying monthly, bimonthly, or biweekly. Some loan companies even allow borrowers to pay off their principal faster by allowing “accelerated” payment plans.

It’s possible that you’d benefit from having your mortgage payments spread out over a longer period of time. Perhaps you’re more interested in accumulating equity rapidly. You should weigh your monthly budget against the amounts listed here to determine which option is best for you.

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