Bi-Weekly Verses Monthly Loan Payments: Truth or Dare?

Posted by Steph Kaye on Tuesday, March 22nd, 2016 at 10:13am.

 

Mortgage payments are traditionally monthly bills.  When submitting payments on a monthly basis, your monies are applied to the principal of the loan, the interest, AND the escrow.  However, most mortgage lenders offer a biweekly payment plan which allow for mortgage holders to pay every two weeks rather than once a month.  Biweekly payment plans sound easy enough and it would seem that the balance of the loan would be reduced at a faster rate, resulting in less paid interest over time, faster build-up in equity, and paying of a mortgage way in advance.  This option can sound extremely appealing, but it is important to understand the disadvantages to such a payment option and whether or not practicing this financial option on your own might be more benecificial.  

BIWEEKLY PAYMENT PLANS

There are always two sides to every story and biweekly mortgage payment plans do not always offer a happy ending.  Often times, when sending in your biweekly payment, the company which is servicing the loan will hold your payment until the second payment arrives.  The company will wait until the full monthy payment is received prior to applying your finances to your mortgage.  To your mortgage company, it looks as if you are making monthly payments rather than biweekly, thus saving you nothing in interest because, technically, you are only  making monthly payents.  Often times, biweekly payment plans can cost more money as the companies that offer such plans charge handling/delivery fees for these plans.  

Remember: traditionally lenders who originate mortgages do not actually service the loans and they are often handled by a third party processing service.  If you are interested in biweekly payments, you do not need to go through a formal process with your lender in order to set one up.  You can do it yourself!   

VOLUNTARY EARLY PAYOFF

You can make extra payment on your mortgage at any time.  Early payoff can be achieved by overpaying on the loan a little each month.  Perhaps you have an extra $100 in your budget.  This can be added to that month's payment.  A $100,000 30 year fixed rate mortgage at 4% interest can be reduced by roughly 8.5 years when adding $100 a month to each loan payment.  This would be an overall savings of $22,462 in interest!  Can you say, "Vacation home down payment"?  

Consider this option:  skip the third party processing and make an extra payment each year that you wouldn't make if you paid monthly.  If you continue to pay monthly, but make one exra mortgage payment at some point in the year, you will get the same result.  Extra money from tax returns, a work bonus, or unexpected monetary gift can be applied to your mortgage, however be sure to verify that exra monies are being applied to the principal and not just the interest in order to receive the full financial benefit while remaining on track for early loan payoff.  Make sure that the terms of the loan do not allow for a prepayment penalty.  

 

 

If you'd like to learn more about Luxury Real Estate, please don't hesitate to message Lang Premier Properties online or call us at 1-855-526-4466.

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