As anyone on the housing market knows, mortgages come in all different shapes and sizes. There are fixed and variable choices, differing mortgage rates, and a whole lot for homeowners to consider. And, just when you thought you had gotten your head around the options, payments rear their ugly heads.
Repayments, of course, are at the heart of any mortgage. Higher repayments generally mean a shorter-term loan and less paid in interest. That’s something most borrowers understand, however, few homeowners realize that there’s more than one way to pay a mortgage.
Simple monthly mortgage payments are the most commonplace. Another alternative is to pay more than the minimum monthly payment necessary. However, the extra money will go toward your next monthly payment instead of the mortgage principal unless specified. For this reason, it’s worth considering biweekly mortgage payments. This type of payment structure can be extremely beneficial for many borrowers, and it’s something that surprisingly few of us realize is an option.
What Are Biweekly Payments?
Biweekly mortgage payments are repayments that homeowners make every two weeks. A biweekly mortgage is in itself no different from a standard mortgage agreement. The main difference is that homeowners will make one extra monthly mortgage payment a year.
Even better, this payment arrangement is a pretty painless repayment option, allowing families to shorten the repayment of their loan by four to six years, and reduce their interest costs in accordance.
How Do Biweekly Payments Work?
To understand precisely how biweekly payments work, it’s essential to make sense of the function of a standard mortgage repayment schedule.
When homeowners make twelve yearly repayments, a portion of that payment will go towards the mortgage interest and the rest will go towards the principal. As your mortgage progresses and your debt decreases, you pay less interest, and thus more money towards principal repayment. This process is referred to as amortization, and mortgages typically take around thirty years to clear this way.
With biweekly payments, homeowners can shorten the amortization cycle by making 26 payments in a year. In other words, biweekly mortgages mean paying thirteen months off your mortgage in twelve. This extra payment goes solely towards lowering overall mortgage amounts and thus reducing interest further without pushing homeowners towards higher monthly payments they may not be able to afford.
Does Paying Your Mortgage Every Two Weeks Help?
In large part, the benefits of payments every two weeks depends on your circumstances. By reducing total interest costs by around 25 to 30%, biweekly mortgage payments can undoubtedly help some homeowners. As an example, a homeowner who owes a total value of $300,000 with an interest rate of 4.0% could save a borrower nearly $30,000 in interest charges and result in the loan being paid off 5 years earlier.
With a biweekly mortgage payment, homeowners will also need to consider setup fees and potential late payment costs before deciding for sure whether a mortgage like this makes sense. Even so, some homeowners are able to shave thousands off their mortgages this way.
A biweekly mortgage calculator is the best way to arrive at exact amounts or ask your mortgage lender to help determine the savings.
Making Biweekly Payments Through Your Lender
If biweekly payments have caught your eye, then you may be wondering how you can arrange these with your lender. Most lenders will be able to transfer to the biweekly payments with minimal effort. Make sure to check with your mortgage servicer to see if they charge a fee for biweekly payments as some do and some don’t. It’s important to read the fine print whether you are making payment changes to an existing mortgage or taking out a new mortgage.
The main thing to bear in mind is timing when setting the biweekly payment up. If you’ve already paid your mortgage for the month, you may end up having to pay a month and a half, thereby stretching your budget more than you can manage. As such, always make this switch before your mortgage date so that you don’t land yourself in financial trouble.
Be sure to ask your lender crucial information regarding value, including:
- How your payments will be credited
- Whether your extra payment will be applied directly
- How much you stand to save over your mortgage term
By answering each of these, you can guarantee that a biweekly plan really is your best option.
The Benefits Of Scheduling Payments This Way
The main advantage is the option to save money on total interest rates over your mortgage term. Given that most homeowners pay substantial amounts of interest on even small mortgages, reductions here are always worth making. In turn, these savings result in shorter mortgage terms, which can lead to further benefits that include:
- A faster way to build equity
- Budgeting that’s easier to manage
- Less stress when it comes to your mortgage
When A Biweekly Mortgage Plan May Not Make Sense
As much as biweekly plans can be beneficial, there are also times when homeowners would be better off avoiding them. After all, a higher number of yearly repayments isn’t going to suit everyone, and it may not mathematically calculate as the best way to save.
Some mortgage lenders charge a fee from $400 to $1,000 for biweekly switch overs, so homeowners should weigh their options before committing. Also, remember that a biweekly mortgage payment is a permanent agreement and with the risk of added late fees, homeowners need to consider every potential pitfall beforehand.
Would A Shorter Term Loan Be A Better Way To Go?
Homeowners who can afford to cover the costs of shorter term, higher monthly payment loan will see more benefits from this type of mortgage than they would a biweekly option. While biweekly payments can drastically reduce interest rates, shorter term rates will typically be lower in the first place if you agree to a term of 15 to 20 years instead of a 30-year biweekly option. In fact, you could save substantial amounts of money if this is an option you could feasibly afford when you originally take out the mortgage.
Let Your Mortgage Lender Help You Decide Your Best Financial Option
Whether or not you should consider a biweekly plan comes down to the advice of your mortgage banker. Trained mortgage lenders in Illinois and the rest of the U.S. know precisely what mortgage solutions are available, and which would best suit each person who comes to them. With access to mortgage calculators and the best tools on the market, they’ll be able to guide you on whether a biweekly payment option is worth your while.
Remember that a mortgage lender has no incentive to trick you into payments you can’t afford. If they’re directing you away from a biweekly mortgage, then you would do best to listen. Equally, if they’re encouraging you towards this plan, then it’s well worth your consideration.
Setting Up A Biweekly Mortgage Plan
If you do decide that a biweekly mortgage is the way to go, you’ll want to know how you can set up your biweekly mortgage plan. In reality, the best option here again depends upon your financial requirements.
As mentioned, most mortgage lenders will be able to provide a biweekly option, but some now include fairly expensive start-up fees to go along with it. So you will want to check first to see if your lender charges low or no fees. Also, be wary of scams where they claim to set up a biweekly payment for you. That said, a professional touch can take a great deal of effort and concern out of this payment set-up.
If you’re feeling brave, you could always embark on what is commonly termed as the ‘do it yourself biweekly mortgage.’ To achieve this goal, you simply need to take your routine monthly mortgage amount and divide it by twelve, then make one principal-only extra mortgage payment for the resulting amount each month. You should also check to make sure that you don’t get penalized for paying off your mortgage early. Most do not carry a penalty anymore, but it is worth checking.
There is no one-size-fits-all mortgage solution for every homeowner in the country, but knowing your choices is important for finding the ideal mortgage. A biweekly mortgage might not be for everyone, but it could be a smart move for you.
A and N Mortgage Services Inc, a mortgage banker in Chicago, IL provides you with high-quality home loan programs, including FHA home loans, tailored to fit your unique situation with some of the most competitive rates in the nation. Whether you are a first-time homebuyer, relocating to a new job, or buying an investment property, our expert team will help you use your new mortgage as a smart financial tool.