Pay off Your Mortgage Years Earlier
By Teresa Ambord
Most deals that sound too good to be true, really are not true. The exception may be bi-weekly mortgages (sometimes called bi-monthly). Under this plan, if you make the equivalent of one extra mortgage payment per year, you will literally knock years off your home loan, and save tens of thousands of dollars in interest.
Here’s a concrete example:
Suppose you have a 30-year mortgage for $100,000 at 6.5 percent. By the time you pay it off at the end of 30-years you will have paid the $100,000 plus an additional $130,000 in interest, for a total of $230,000. On a bi-weekly plan, the same loan will be paid off in less than 24 years (75 monthly payments early) and you’ll save nearly $100,000 in interest. That’s a boatload of savings.
Of course, if your finances are tight, you may be reeling at the idea of paying an extra mortgage payment each year. But don’t let it throw you. First, the incredible savings are well worth the effort. Second, there are different ways to make the extra payment, one of which might suit your budget.
You can set up a plan for making the extra payment through your lender, or you can do it without them. But before you begin, you do need to ask your lender if your mortgage includes a prepayment penalty. If there is, ask how much. It may still be well worth it.
Here are three types of bi-weekly plans:
- A true bi-weekly (or simple interest bi-weekly plan): With this plan, you pay half of your mortgage payment every two weeks instead a full payment once a month. Since there are 26 two-week periods in a year, by the end of the year you will have made 13 full payments instead of twelve. Your lender will credit your account as payments are received, which means that every two weeks your principal is reduced. Because of the rapid principal reduction, this is the quickest payoff.
- A pseudo, or standard bi-weekly mortgage is paid the same way, half a payment every two weeks. But your lender credits your account only after both halves of a payment have been received, which is every four weeks. Again, you’ll have made 13 payments by the end of the year. But because your principal is reduced every four weeks instead of every two, you pay a little more interest, but not much.
- Then there is a do-it-yourself bi-weekly. If finances are tight, this may be your best option. It couldn’t be simpler. Each month you pay your usual mortgage payment, plus an additional 1/12 of a payment. So if your monthly mortgage is $1200, 1/12 would be $100. Add that to your monthly payment, for $1300 a month. At the end of the year, you have still paid 13 full payments. Again, you’ll pay a little more interest than either of the two other options, but you will still save a bundle.
For the first two plans, you will need to ask your lender to make the arrangements, or use a third-party service. When you first get a loan or refinance a mortgage, you may be bombarded with offers from third-party services who will set you up on a bi-weekly plan. Before you agree, check with your lender. Many of them will set you up for free. Or, if you choose the do-it-yourself plan, you don’t even need to notify your lender. Just do it.
