What Advantage Is There With Mortgage Plans That Have Bi-weekly Payments?
Posted by nick_niesen on October 29th, 2010
Some mortgage companies allow you to set up your mortgage so that you are making bi-weekly payments. This allows you to pay off your mortgage at a much faster rate. While certainly not for everyone, here are some things that you need to know as to why you may want to consider getting your mortgage with bi-weekly payments.
The most beneficial bi-weekly payment option, which is a true bi-weekly mortgage payment plan, will take payments out every two weeks. Yes, they like the automatic payments - probably better for you, too, that way you do not have to worry about late payments. The first payment is half of your monthly mortgage payment, and then the second one is also half. All together, you will have paid the equivalent of 13 months of payments in only 12 months.
The difference in programs that have bi-weekly payments makes a real difference in how much you end up paying. This means that you need to understand exactly what happens with the payments when the company gets them. What you want is to have your lender apply the payment to the mortgage on the very day that they receive it. This will give you a nice reduction in interest.
Other lenders, not wanting to lose some of that sweet interest, put your payments into another account, and then when they have a full payment for each month, pay for that month. Also, at the end of the year, when they have the full 13th payment, then it gets applied. What a difference it will make over the years in the interest that you pay when the lender fools around like this with your money. What you want is for the payment to be credited to your account when you make the payment.
A similar effect can be obtained if you make an extra payment each year on your own, but the savings will not be quite as good. Being that with a real bi-weekly payment plan, you could pay off a 30-year mortgage in about 18 to 22 years, the potential savings are tremendous. It is possible to save about $34,000 for each $100,000 that is owed.
Anytime that you make extra payments on your mortgage - the effect is the same - reduced interest rates. Bi-weekly payments allow you to have big savings on your mortgage, and will also allow you to build up equity in your home at a much faster rate, too.
If you already have a mortgage, your lender may not allow you to easily switch to a plan with bi-weekly payments. Since it involves more work for them, they may not want to be bothered and may not even offer such a program. Even if they have it, about the only way some lenders would allow you to make the change would be for you to refinance your mortgage and then all fees would apply, including points.
A bi-weekly payment mortgage plan is also a little higher in interest because of the added work for the mortgage lender. Be sure to look at all the fees that may apply, and then compare offers thoroughly before you buy.