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If you’re a homeowner, chances are you’re making monthly payments towards your mortgage. This would be equal to 12 payments a year, and no extra fees if they are all made in full and on time. A simple, predictable, easy to budget plan. Why change anything?
Have you considered the benefits of making biweekly payments instead? This means putting money towards your mortgage every two weeks, and as a result, you’d save thousands of dollars on interests, and be free of debt in a much quicker pace. Sounds pretty cool, right? So how does it work exactly?
If you decided to pay twice a month, that would add up to 24 payments a year. But there are 52 weeks in a year, therefore, in a biweekly mortgage payment plan, you’d be making a total of 26 payments instead. So how much would you be saving with those two extra payments? It could save you tens of thousands of dollars in interest. Nice! You’re now probably ready to hop on board.
How Much Will You Save?
My absolute favorite mortgage calculator is the one Vertex42 makes. You can use it with Excel or Google Sheets, and it is FREE! It’s easy to see how much you save when you set the payment frequency to “Accelerated Bi-Weekly”.
On a $250,000 mortgage at 5.5% Interest, biweekly payments cut over five years of the length of a 30-year mortgage and save over $50,000 in interest!
When Should I Start Making Biweekly Mortgage Payments?
A biweekly mortgage payment plan can save homeowners thousands of dollars in interest and allow you to pay off your home very quickly. Before you make any rash decisions, make sure early payoff suits your budget plan and that the benefits outweigh the risks.
Consider waiting on extra mortgage payments until you are debt free. Mortgage debt is often lower interest than credit card debt and so it makes more sense to pay off credit cards first. In fact, most experts will advise that you also have a 3-6 month emergency fund in place before starting to pay off mortgage debt.
If you have used the debt snowball concept to pay off your debt, you could start throwing all or part of your snowball towards the mortgage to help you reach true debt freedom as soon as possible.
Where to Start?
First of all, make sure this program works for you and fits your budget. If your earnings vary or you’re paid once a month, you’d have to make sacrifices to stick to this plan, like going the extra mile to be well-organized with your bills and due dates.
If you get paid monthly, for example, you can acquire similar benefits of a biweekly payment by just adding the additional principal to each regular monthly mortgage payment.
You can confirm this is the best arrangement for you by comparing both monthly and biweekly plans with a specialized calculator (you can find lots of them on Google).
Find Out How Your Bank Handles Extra Payments
It’s been a few years since I owned my home but when I did, Wells Fargo advised against making manual bi-weekly payments as they would be looked at by the system as “partial payments” and may not be allocated correctly.
At the time, their recommendation was to go on their automatic biweekly withdrawl program or, if I needed to make payments manually, to make at least my regular minimum payment in one transaction and, if I wanted to, add additional principal payments throughout the month.
Setup Automatic Withdrawl
Setting up an automatic withdrawal plan with your bank will guarantee payments are made on time and can help you stay on track. This can improve your credit score, but it can affect you if you’re not responsible.
Consider whether you’d rather keep some flexibility instead of committing to paying your mortgage loan every two weeks. If you decide you want to go for it, verify that you counted the weeks correctly to avoid any fines.
Now that I am completely debt free, my rent (I no longer own) is setup on autopay. That was the last “bill” to be setup that way for me though as, due to the large amount, it is the scariest and you definitely don’t want to have it bounce.
Send Extra With Each Payment
You can also divide the monthly amount due by 12 and add that smaller difference to the total payment. For example, if you pay $1,500, you’d add an extra $125 monthly, making it a total of $1,625.
Doing it this way can still save years off your debt. This is the method I used most of the time for my extra principal payments when I had a mortgage.
Just confirm with your bank that the amount goes towards the loan’s principal, not to the interest and that there are no penalties for making early or extra payments. When I paid my mortgage with Wells Fargo, there was a separate section for me to break out the extra funds to be applied to the principal.
If this plan does not work for your budget, then you can always decide on making a lump sum payment when you have some extra cash. This would equal to 13 payments annually instead of 12.
How to Calculate How Much to Send 1x Per Month?
If you want to still pay your mortgage once per month, but want to make sure you get that one extra payment in per year, as you would with a biweekly mortgage payment, here is how you calculate that:
(Normal Mortgage Payment x 13) / 12
So, if your normal monthly mortgage payment is $1,500. If you want to make 2 extra payments per year, the calculation is:
(1500 x 13)/12 = $1625
You would make a $1625 monthly payment instead of $1500. That extra $125 per month would save you thousands of dollars in interest and shave several years off your mortgage.
What about Mortgage Servicer Sponsored Plans?
Before you sign any contract with a payment processing company, ask questions and read the fine print. These businesses can charge up to $300 to $400 for their services. Making an extra payment on your loan wouldn’t normally cost you anything, but they have to make a profit. Be certain this is the most convenient setup for you.
It’s extremely important that you are informed of every detail on how your payments are handled. Some of these businesses actually hold on to the second payment and only deliver one per month, so you’d actually be paying them for nothing. Make sure the money goes towards the debt, not the interests, and is paid directly to the company that made the loan. If you see anything suspicious, trust your instincts, do some research, and protect yourself from scammers!
Processing your biweekly mortgage payments through a specialized company is on only worth it if it’s impossible for you to make payments on time. There’s nothing better than handling your finances on your own, but it’s understandable that help is needed sometimes, especially if you have a hectic schedule.
The Bottom Line
Biweekly mortgage payments can really help you save money on your home. Mortgage interest adds up over time so the sooner you can pay off your home, the better. Figure out how many extra payments per year you want to make. A biweekly mortgage payment schedule normally results in 13 payments for the year vs. 12 with a monthly mortgage plan.
There are several different ways you can accomplish the same goal and receive similar savings but be sure that your budget can afford the changes and, please, don’t start paying extra on your mortgage until all your other debt is paid.
If you are looking for other great ways to save money, remember our Resource Library is FREE and we have tons of great savings trackers available for you. Be sure and check out our post on money saving challenges too!