What Advantages Does a Bi-weekly Mortgage Payment Offer?
One of the most precious assets that you are likely to possess as you progress through life is your home. Owning a home has been called “The American Dream” - something that most Americans strive for.
Unfortunately, for the vast majority of people, one of the major drawbacks in owning a home is the long-term mortgage that must be paid off. Mortgages often stretch out 25 and 30 years with interest and principal repayments.
Borrowers have opportunities to lower the length of time that it takes to pay-off their home and save money. For example, a bi-weekly payment option may be ideal for those who plan on spending a long time in a home or who want to use it as an investment for greater profit sooner rather than later.
Most mortgage repayments are made on a monthly basis. However, arranging to make payments bi-weekly can have a dramatic effect on the amount of money you have to pay and the time frame before it is all paid off.
When a mortgage is taken out, the first few years of payments are largely eaten up by the interest since the money paid each month is applied to the interest due on the loan first (and it is initially nearly 100% of the loan value).
Under a bi-weekly mortgage, instead of making your mortgage payment once a month, you make half the payment every two weeks. If your mortgage is $1,000 per month, under a bi-weekly system it would be $500 every two weeks. This works for most people since they receive a payroll check every two weeks.
Over the course of a year you make 26 payments, which is the equivalent of 13 monthly payments rather than 12. The extra payment should be taken directly off the principal, reducing the payment schedule accordingly. While $1,000 may not seem like a lot initially, imagine that over a 20 year period you will have paid an additional $20,000 to the loan - nearly two years’ worth of normal payments. Also, when interest rates are higher, an extra principal payment will have even more power when compared to today, when interest rates (and monthly payments) are historically much lower.
While some banks and mortgage companies offer a bi-weekly payment option, not all do and some do but only on certain types of mortgages. That doesn’t mean that a bi-weekly payment schedule isn’t an option at your bank, even without refinancing your mortgage. Some “loan servicing” or “administration” companies will offer to do this, but they will charge you to set up a bi-weekly payment system for your mortgage.
If you have a mortgage, you should know that it is maintained as a public record in your county’s information center files. That makes it quite easy for loan servicing companies or mortgage administration companies to get information on your mortgage – including the lender, amount, and term. Because this information is easily accessible, you may have received a solicitation or “invitation” from a payment servicing company to make your payments bi-weekly.
Be wary of independent companies offering to do this for you for a fee — with some self-discipline you can get the same results for free.
Myths and advantages
Savvy consumers need to understand what bi-weekly mortgage programs will and will not do for them. Here are two common misunderstandings:
Myth No. 1: Paying your mortgage twice a month gives you better credit.
Wrong. Banks often use an automatic draft for their biweekly plans, which means all your mortgage payments will be made on time -- and that will help your credit. But you can get the same effect on a monthly plan using electronic bill pay or an automatic bank draft from your checking account.
Myth No. 2:Paying twice a month reduces the compound interest on your mortgage.
Wrong. In fact, even though you are paying biweekly, chances are a loan servicing company is paying your loan monthly. This means that if you ‘buy’ into a bi-weekly plan, you are actually loaning the servicing company half of your mortgage payment -- interest free -- for at least two weeks every month.
And, committing to a bi-weekly mortgage payment is just that – a commitment. To preserve financial flexibility, it's always better to NOT make the additional principal payments contractual. When you switch to a bi-weekly payment system you give up that flexibility. Be disciplined and make the extra principal payments when you can, and if things get tight you have financial flexibility.
Using a bi-weekly payment system WILL chop away at your interest because you’re making two additional half-payments going toward the principal each year. In other words, by making 26 payments of half your mortgage, you are in effect making 13 monthly payments instead of the customary 12. Depending on the terms of your loan – length, interest rate, etc. -- one extra payment a year made for the life of your loan will enable you to pay for your house an average of four to eight years ahead of schedule.
The price tag
Bi-weekly payment programs are easy, but the convenience can come at a cost. Loan servicing companies generally charge an enrollment fee that can range from $195 to $379. Some also levy additional charges on every transaction. Others companies charge as you go -- without the hefty upfront charge -- fees can average from $4 to $6 per bi-weekly payment (that’s about $100-150 per year).
Free alternatives to biweekly programs
While hundreds of thousands of mortgage holders have signed up for bi-weekly payment programs, they represent only a tiny fraction of the overall number of mortgage holders, according to estimates from the top five loan service providers.
A true bi-weekly mortgage-- one that you set up when you buy your house or when you refinance -- is rare. Not every lender offers them. In any case, remember that it's possible to get many of the same benefits of a bi-weekly payment schedule for free.
1.Pay an additional one-twelfth of your mortgage each month. Designate on your payment coupon that the amount should go against the principal. If you use online banking or online bill pay to make your mortgage payment, you can do this as well and most systems will enable you to do this easily.
2.If you get a bonus or tax refund each year, add the equivalent of one extra payment to your mortgage. Again, tell the bank or mortgage company that the additional money goes toward the principal.
3.If you get paid bi-weekly, take half of your mortgage payment from each check and put it in a savings account. At the beginning of the month, transfer the money or write your mortgage check from that account. At least twice a year you'll be including the equivalent of an extra half-payment. Specify on the mortgage coupon (or online banking transfer) that the additional money should be applied to the principal.
Bi-weekly payment options can save money and reduce the length of time to pay-off a mortgage . . . for most people. You should receive professional financial advice when considering switching to a bi-weekly mortgage payment schedule - - - start out by asking your bank lender.
F&M Trust’s ONLINE BANKING can help
One of the features in F&M Trust’s Online Banking enables customers to make “principal only” payments. Loan customers can make online transfers to their loan accounts as their normal payment, as principal only, or a combination of both normal payment and principal to ensure that the additional money gets applied directly to the principal. To access this function, click on the “Transfer Funds” button at the top of online banking to enter the transfer screen. Then simply select the account sending the funds from the top dropdown box, and the recipient account from the second dropdown box. When a loan account is selected as a recipient, the “Amount” field will be split into two fields, one for “Loan Payment” and one for “Principal Only.” Users can then click “Continue” at the bottom of the screen to confirm the payment.
Online Banking and Online Bill Pay are great tools for managing your money and your various bank accounts including checking, savings, and loans. And best of all, they are FREE!