Bi-Weekly Payments vs Monthly Mortgage PaymentsBy Caitlin in Mortgage
Consumers who are thinking about starting a bi-weekly mortgage plan may be hoping to pay off their mortgages more quickly. However, this could be a less than ideal solution. Bi-weekly mortgage plans might sound terrific, but the program is not without risks. In fact, there might be better and less expensive ways to owning a home.
Typical Mortgage Payments Explained
Typical mortgages generally require one payment a month. This is equal to 12 payments a year. If a consumer has a typical 30 year mortgage with fixed rates, it will take about 360 payments to pay off the loan in full.
Mortgage payments are split into two parts. There’s a portion designated for the principal and a portion designated for the interest. The principal is applied towards the balance of the loan while the interest is the cost for borrowing money from the bank. Once the loan has matured, the balance between the interest and principal shifts. However, during the earlier part of the mortgage, the interest portion is much larger. This is why after only 5 years of repayment, the balance of the mortgage has barely been paid at all.
Bi-Weekly Payments Don’t Mean Less Interest
These bi-weekly mortgage loans cannot circumvent the amortization schedule, despite making 13 payments a year. Technically, you can’t make 13 payments per year with a mortgage, so that extra payment is applied to the principal of the loan. Bi-weekly payments will shorten the majority of loans by about four years. Yes, these payment plans do work, but there are a couple of reasons why a borrower might not way to enroll in this type of plan:
- Self-Managed Bi-Weekly Payments Offer Better Results
- Self-Managed Bi-Weekly Payments Are Not Obligatory
Consumers can achieve the same results as a bi-weekly payment by making their regular monthly mortgage payments and adding an additional 1/12 of mortgage payment to the principal. This method achieves the same results without having to make 2 payments each month. Best of all, if consumers miss making that 1/12 of a payment, it doesn’t affect their credit.
Extra Payments aren’t the Only Trick in the Book
Putting aside the fancy calculations involved in bi-weekly payments, when mortgage rates are low, it might be time to get a whole new mortgage. Extra payments might speed up loan repayment, but not as fast as a no-closing cost refinance can. If consumers do that, they can put some of that monthly savings back into the loan’s balance and the payoff date continues to shrink even more.
When lenders present different repayment options, it’s best for consumers to research each option carefully. Some terms might look good on paper, and the math might add up perfectly. However, that doesn’t mean the repayment terms being offered are the only option available. Consumers should do a little research and think outside the box. There are many repayment strategies, and different ones work best for different people.