Should you pay your mortgage bi-weekly?
Bi-weekly mortgage payment programs are something that many people take advantage of and seem to be happy with. The most common reason people give me when I talk with them about bi-weekly mortgage programs is that they want to pay their house off early and bi-weekly programs seem to match up well with their paycheck schedule.
If you get a regular paycheck and are interested in paying off your house early, a bi-weekly mortgage payment plan can make a lot of sense.
How Bi-Weekly Programs Work
Once you have signed final paperwork for your mortgage, many lenders will send you a mail piece offering “bi-weekly payment plans” that you can sign up for. There is almost always a price to sign up for bi-weekly payment programs – typically $250-$500 up front and then $5-10 each payment. Prices will vary, but the first thing to be aware of is that bi-weekly payment programs are usually not free.
Once you are enrolled in the bi-weekly payment program, you will be making payments via EFT (Electronic Funds Transfer), which means that you will make 26 payments per year instead of 12 – and essentially, you are making 13 monthly payments rather than 12, with the “extra” payment going to principal.
Depending on your interest rate and term of your mortgage, just making 13 payments a year instead of 12 you can reduce anywhere from 6 to 8 years from a 30-year mortgage.
When Bi-Weekly Programs Make Sense
If you get paid twice-a-month and live within a tight budget like many Americans, I recommend considering a bi-weekly mortgage program. There are costs, but the ease of being able to know that you are making a smart financial decision is something that you can simply set up and then forget about.
For most of my life, I have personally been on a bi-weekly mortgage program and for most people I know, it makes sense.
How to Avoid Costs of a Bi-Weekly Plan
In the event that you are one of the people who take the position that the costs are simply too high for a bi-weekly program, there are two simple things you could do that will have the same financial effect on reducing the term of your mortgage:
- When you make your payment each month, add an additional 1/12th of a payment and indicate that it should go to the principal balance
- Make an extra payment once a year and indicate that the extra payment should go to the principal balance
As with everything in life, convenience has a price. And when it comes to paying off a mortgage early using a bi-weekly mortgage payment program, setting it up so you can forget about it is worth the price.
At least it is to most people.
Justin McHood works for Academy Mortgage and is based in Chandler, AZ. He is a contributor to Zillow Blog and has conversations about mortgages whenever he can. Learn more about Justin at http://www.mortgagecommentator.com.