Your mortgage came with mortgage coupons or at the very least, a due date once per month. This is when you must pay your mortgage. The consequences of missing a payment are serious. Some mortgage companies provide a small grace period, but this doesn’t mean you should not make your payment on time. The grace period helps you avoid late fees. Beyond those few days, though, the lender charges for late payments and reports your late payments to the credit bureau if they reach beyond 30 days.
The due date is not the only date to pay attention to, though. Just because your mortgage has a specific due date, doesn’t mean you cannot pay early. Biweekly payments can easily knock off thousands of dollars’ worth of interest off your bottom line. Not everyone can swing it, but those who can realize significant savings on their mortgage.
What are Biweekly Payments?
Biweekly payments, as the name suggest, are payments you make every other week. Rather than paying the full amount of your mortgage payment once a month, you pay half of the total due every other week. You send the half payment into your lender one week and two weeks later (before your actual due date) you send the remaining half. This helps to decrease the amount of the principal faster. Since the bank charges you interest based on the outstanding principal amount, you automatically lower the amount of interest you pay. This helps you tackle the principal faster and potentially cut a few years off your loan term.
The Downfalls of Making Payments Biweekly
It might sound like a perfect plan to pay your mortgage off early just by making payments twice per month rather than once. It doesn’t cost you any more money and you cut years off your term. However, there is a catch. Not all lenders credit half payments. If they receive half of your mortgage payment, they may hold onto it until they receive the other half in two weeks. This bypasses the benefit of these extra payments. You don’t cut your principal down and you pay the same amount of interest.
Another downside of biweekly payments is the charges some lenders make you pay. Some consider it a “service” to offer the option to pay biweekly. They get away with it by requiring automatic withdrawal from your bank account for the payments. This way they can charge you for the service. This takes away from the money you save and may not make the extra payments worth it.
Making the Payments on Your Own
There is a way to make the payments on your own, though. Rather than sending the money in every 2 weeks, save it. You can send the money in all at once; just send a little extra with each payment. You can figure out the extra amount you want to send based on any of the following ideas:
– 1/12th of a full mortgage payment – If you pay a fraction of the amount due in one payment each month, at the end of the year you make one full extra mortgage payment. This has the same exact effect as making biweekly payments.
– Make one extra payment per year – If you prefer to earn the interest on your money throughout the year, put away 1/12th of the mortgage payment in a savings account. When you have the full payment, send it to your mortgage company. This has the same effect as above.
– Make a lump sum payment – If you know you will receive a bonus or other type of windfall, make your extra payment all at once. This way you don’t have to worry about how much extra you need to pay each month or to save up in order to cut your principal down faster.
No matter which method you choose from above, you do it on your own. This way you avoid any 3rd party or lender fees. You save the money and still save thousands of dollars on your interest if you stay the course and make the extra payments each year.
Dedicating the Funds
One thing to watch when you make extra payments is where the lender credits the funds. If you look at your mortgage coupon, there is probably an area to mark where your extra funds should go. Make sure to fill in that box. If you don’t, the lender may automatically apply it to the interest. This could negate the benefits of paying extra. If you make your payments online, there is a similar box to check when you make your payment. You should always follow up with your lender to make sure the payment was properly credited to ensure you meet your goal of paying your mortgage down faster.
Every Little Bit Helps
Keep in mind that even if you cannot afford to make a full extra payment every year that you can still benefit from a little extra. Even $100 per month can knock off 8-10 years off your loan depending on the term and interest rate you pay. 8 years of interest could amount to $15,000-$20,000. So the next time you think it’s only $100 and it’s not worth it, give it a try – you might be pleasantly surprised to learn you own your house faster than you thought possible.
Biweekly payments are the most common way to pay a mortgage down faster, but it is not the only way. Any extra payments you make towards the principal help to pay your loan off quicker. If you receive your paychecks on an irregular schedule or you just don’t have the money to make payments every other week, consider making extra payments anytime you can. Even if it is every other month or only a few times per year. The extra money knocks your principal down and reduces your interest. In the end, you will own your home for less money and in a faster timeframe than you thought possible.