If you’re a homeowner with a mortgage, you’ve probably seen biweekly mortgage payment promotions from your lender or third-party companies. Let’s review what a biweekly payment program is and whether you can save money.
What Is a Biweekly Mortgage Payment Program?
A biweekly mortgage payment plan allows you to make half your mortgage payment every other week.
Doing so means you’re making 26 half-payments per year, equivalent to 13 full monthly payments per year instead of 12.
This is a slight budget increase overall, but spreading it out over twice a month instead of once per month may make you feel it less. (Of course, each person is different, so you must decide for yourself if this approach is a good fit for your budget.)
The overall impact is impressive. If you start a biweekly payment plan the first month you start paying on a 30-year fixed loan, you can pay the loan off four to six years early and save thousands of dollars.
For example, if you have a 30-year fixed loan of $200,000 at 4.5 percent, a biweekly plan would save you $27,240 and you’ll pay your loan off four years and four months early.
What Is the Risk of a Biweekly Mortgage Payment Program?
Some biweekly payment programs — especially those run by third-party companies other than the lender that sends your loan statements to you each month–will charge fees for this service.
They can charge significant upfront fees, plus small fees along the way for each biweekly payment processed. It can take up to 10 years for participants in up-front-fee plans to recoup their costs — and if you sell or refinance before that time, the fees exceed any savings potential.
The Consumer Financial Protection Bureau — which is the mortgage industry’s primary regulator — has taken a dim view of these fee practices. This is a good thing for consumers, because it helps weed out high-fee vendors.
Still, it’s difficult to know which third-party providers you can trust, so the best practice is to only set up a biweekly payment plan with the lender that sends your loan statements each month.
In most cases, your lender won’t charge fees for this service. Ask your lender to brief you on their biweekly plan terms.
Another Tip For Benefiting From Biweekly Payment Methodology
Alternatively, you can accomplish the same goal with guaranteed zero fees by managing it yourself.
The mathematical equivalent of a biweekly payment program is simply making a thirteenth monthly payment per year.
For the $200,000 loan example above, your mortgage payment is $1,013.37 12 times per year. If you pay this amount a thirteenth time each year, the entire $1,013.37 on that thirteenth payment is applied to paying down principal, and you’ll pay off your loan four years and four months years early.
Or you can divide the $1,013.37 by 12 months and pay $84.45 in extra principal each month. The end result is the same: you’ll pay off your loan four years and four months early.
You do this by using the option on your monthly mortgage statements that allows you to include an optional ‘Additional Principal’ payment.
For more real estate tips and tricks, visit Residence HQ.