Bi-weekly mortgage payments offer a potentially effective strategy to reduce the overall term of your loan while lowering interest costs over time. Instead of making one monthly payment, you make half of your regular mortgage payment every two weeks.
Here's how it works: By opting for a bi-weekly payment schedule, you end up making 26 half-payments in a year. Since there are 12 months in a year, this equates to 13 full monthly payments rather than the standard 12. This "extra" payment helps lower the principal balance more quickly than monthly payments, potentially saving thousands of dollars in interest and reducing the loan term by several years, depending on the interest rate and loan amount.
Eligibility and Requirements:
- Not all lenders offer a bi-weekly payment plan directly, so it’s important to check if your lender provides this option.
- There might be fees associated with setting up a bi-weekly payment plan. Some lenders charge a one-time enrollment fee or ongoing monthly fees.
- Confirm that your loan servicer applies the payments as received and not at the end of the month, which would nullify the intended benefit.
Considerations:
- If your lender does not offer a formal bi-weekly payment option, you can achieve similar results by setting aside half of your monthly payment every two weeks and making an extra whole payment directly toward the principal by the end of the year.
- Ensure that extra payments are applied to the principal only.
- Signing up for automatic payments can simplify the process and ensure timeliness.
By understanding the structure of bi-weekly payments and ensuring proper implementation, borrowers can significantly reduce the total interest paid and free themselves from mortgage debt sooner.
Related reading: early payoff benefits and other extra payment strategies.