My husband and I had owned a house for almost three years and we receive constant text messages about paying our mortgage every two weeks.
The letter usually states how many years you can shave your mortgage payments and how much you can save in interest. The numbers are pretty amazing, which makes these plans tempting.
Here is some information about bi-weekly mortgage payments, as well as the pros and cons, to help you decide if this is the right plan for you.
How do biweekly mortgage plans work?
Biweekly mortgage plans split your monthly mortgage bill in two and pay the halved amount every two weeks. Since there are 52 weeks a year, you ultimately make 26 payments, which corresponds to 13 monthly mortgage payments. This extra payment will go to the client, resulting in a reduced amount of interest. The plans are usually drawn up by the lender or a designated marketing company.
Let's look at an example scenario. Suppose you have a principal of $ 186,281, an interest rate of 5% and a 30-year mortgage (360 months). Your monthly payment would be $ 1,000 or $ 12,000 per year. During the lifetime of the mortgage, you would pay $ 173,717.81 in interest. If you made biweekly payments instead, they would be $ 500 or $ 13,000 a year. This would reduce your interest to around $ 143,000 and shorten the lifetime of the mortgage by around 5 years. That is a saving of almost $ 31,000!
Note: Biweekly mortgage plans differ from bi-annual (or bi-monthly) mortgage plans. With a semimonthly mortgage plan, payments are made twice a month (such as on the 1st and 15th). This saves you very little money. Some lenders will only apply your loan payments once a month, saving you nothing (although this can help you keep track of your finances if you pay twice a month).
Pros and cons of biweekly mortgage payments
- You pay less interest over the term of the mortgage.
- Your mortgage will be paid off faster.
- If you pay every two weeks, the amount of your salary that goes to housing will always be the same. This makes budgeting and personal finance simpler.
- The plan essentially forces you to pay additional mortgage payments.
- Your lender or designated marketing company may request a fee to put you on the plan. It is usually around $ 300, and may also include a fee per biweekly payment.
- If you have purchased a property at the top of your price range, you may not have the money to commit to paying extra for your mortgage each year.
4 Alternative ways to save on your mortgage
While the benefits of a biweekly mortgage plan are attractive, there are some other things you can do to save money on your mortgage and avoid the mortgage costs and dedication to the plan.
1. Pay more for the client
If you want to avoid the costs of the biweekly mortgage plan, you pay an extra twelfth of your mortgage payment every month. You must have the option to pay more on the principal on your receipt. If you do not select this option, your lender can apply the additional amount to your next month's payment. This saves you hundreds of dollars in costs and thousands of dollars in interest! Make sure that the conditions of your loan do not include a mortgage advance fine.
Depending on how much you still owe to your mortgage and what interest you can get, refinancing your mortgage loan may be a good option for you. If you think that refinancing might be the path you want to take, talk to your mortgage broker to see how much you can save and whether it would be worth the cost of refinancing. Also consider getting a shorter mortgage term.
Reducing your home and your life by going to a smaller living space can save you a lot of money. Not only do you have a lower mortgage, you can also save on utilities. You can also sell items on Amazon or eBay if you are smaller.
4. Rent out your space
If you have an extra room, consider renting it out. Make sure you examine your potential roommates to make sure they are reliable and make a lease to protect yourself. Be warned that there are many responsibilities associated with becoming a landlord.
After considering the pros and cons, my husband and I decided to pass on the biweekly mortgage payment plan. As big as it would be to pay less interest and have our mortgage paid off faster (27 years to go!), I don't want to pay the costs if there is an alternative. This will also give us more flexibility. If we can do more to our client in a certain month, we will do this ourselves when we make our payment.
What do you think about biweekly mortgage plans?
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