How Do Bi-Weekly Mortgage Payments Help To Reduce Your Mortgage Payment?
Most people choose to make a mortgage payment each month until the end of their loan term. The payment is made up of principal, interest and insurance in addition to property taxes. However, some people choose to make bi-weekly mortgage payments in an effort to pay their loan off faster. How does making a payment every other week help you?
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You Make the Equivalent of 13 Payments a Year
The best reason to make bi-weekly payments is that you make the equivalent of 13 payments a year instead of the typical twelve. This is because there are 52 weeks in a year, which means you make 26 half payments during the year. Those 26 half payments are the equivalent of 13 full payments even though they are made over the same period of time.
This extra payment is pure principal, which means that you build equity in your home faster and pay less interest over the course of your loan. Also, as the amount of interest that you pay is based on your remaining balance, your payment may go down as you pay less interest on the smaller balance.
Shave Two or Three Years Off of Your Loan
If you have the traditional 30-year mortgage, you will get a full year ahead on your mortgage every 12 years. Therefore, you will pay off your mortgage at least 2.5 years earlier just by making two half payments a month as opposed to one full payment each month. While you still pay the same principle amount for the home regardless of how quickly you pay off the loan, you can save hundreds or thousands in interest payments that you no longer have to make.
You May Get Ahead of Your Payment Schedule
If you make more than your scheduled payment, you may be able to advance your next payment’s due date. After 48 weeks have passed, you will have made 24 half payments, which is equal to 12 months worth of payments. As your next payment is actually a bonus payment, you have a few options depending on your preferences and financial situation.
Your first option is to continue making the bi-weekly payments to stay on pace to pay your mortgage off sooner. This may be the best option if you have gotten into a routine with your payments and don’t want to fall off track. Another option is to advance your due date with the extra payments that you make at the end of the year.
This means that the payment that you make in December would credited toward the payment that is due in January. You benefit if for some reason you couldn’t make an extra payment in a given month as you could skip that payment and still be current on your loan. However, you should check with your lender ahead of time to determine how many months you can advance your loan before you are required to start making minimum payments again.
Refinance After Building Equity and Your Credit
If you have an FHA loan, you are likely paying private mortgage insurance as part of your monthly payment. However, once you have achieved 20 percent equity in your home, you may be able to ask that the insurance be dropped from the loan. This is generally true regardless of your credit score as the lender still secures the loan with your property.
With each payment you make, you build a positive credit history, which may help you increase your credit score. By increasing your credit score, you may be eligible for loans with fixed rates. If you currently have an FHA or some other type of government loan, you could lower your interest rate by refinancing your loan.
Your good credit could also help you reduce your insurance premium, which will also help to lower the amount that you pay for your home each month. Therefore, simply making your payments on time can put you on the path of lower housing costs in the long run.
Use Your Savings to Make Additional Payments
As your monthly payment goes down with each extra payment that you make, you may want to consider committing even more money toward your mortgage. Even if you only contribute another $50 each month, you could make the equivalent of another half payment or even a full payment depending on how much you owe.
Making 26 payments on a bi-weekly basis can help you manage your finances while helping you pay your loan off early. With each extra payment that you make, you reduce the amount that you pay to your lender as interest, which only adds to the cost of owning your home. Therefore, it is in your best interest to adhere to this type of schedule if you are interested in building equity and truly owning your home.