Thinking of ways to pay off your mortgage early? Thinking about signing up for a Biweekly Mortgage? Think again.
The conventional thinking is that increasing the frequency of the payments saves interest over the course of a 30- or 15-year mortgage that can equal years eliminated from your loan.
Before you sign up for this with your lender, let’s see if you’re really saving money.
Biweekly Mortgage Means Better Credit?
Some people believe that making biweekly payments improves their credit, but this is no more than a myth according to experts. Using a biweekly payment schedule set up by your mortgage lender puts you on an automatic withdrawal plan that assures your payments are made on time. If you’re the type of person who misses payments from time to time simply because you forgot to write the check, an automatic payment schedule may improve your credit because of the on time payments, but you can get the same advantage by setting up an automatic monthly payment plan too.
Biweekly Mortgage Means Less Interest?
Sadly, this is another myth you shouldn’t believe. Depending on the particulars of your loan, there is a good chance that the company receiving your mortgage payment isn’t the company that holds the loan. Although you’re paying twice per month, the servicer receiving your payment isn’t making biweekly payments to the company who owns your loan. They’re likely holding it in an account until the end of the month.
Remember that each calendar year has 52 weeks and if each month has four weeks that would only be 48 weeks. This means that biweekly payments won’t consist of two payments each month but instead, 26 half payments which equals the equivalent of 13 monthly payments in a year. If the math is a little tough to follow, it works like this: Biweekly payments are equal to 13 monthly payments in a year where making traditional monthly payments are equal to 12 payments each year. By paying an extra month, you’re paying extra principal which shaves six to eight years off the life of the loan over time.
But do you have to make biweekly payments to do that? You could divide the amount of one month’s payment by 12 and add that amount to your monthly mortgage payment. If you’re paying $1,500 per month, divide 1,500 by 12 and make your monthly payment $1625. Talk to your mortgage company first to make sure there isn’t something more you have to do to make sure it is applied to the principal amount of your loan.
Problems With Biweekly Mortgage Plans
There are two problems, actually. First, the reason your lender wants to sign you up for a biweekly mortgage is because there is usually a fee associated with converting to these plans, and that’s more revenue for the lender. They are charging you to give them a two week loan.
Second, most people have enough contractual payment obligations already. If you don’t have a lot of financial reserves, it’s better to keep some flexibility in your budget rather than committing to biweekly payments.
Don’t fall for the ads to make biweekly mortgage payments. The benefits usually don’t outweigh the gains.