Accelerate Your Mortgage Payoff with Biweekly Payments
If you're on the path to homeownership or already have a mortgage, you might have come across the term "biweekly mortgage." This mortgage product offers an alternative payment schedule that can lead to significant savings and faster loan repayment. In this blog post, we'll delve into what a biweekly mortgage entails, how it works, its advantages, and potential drawbacks.
Understanding Biweekly Mortgages
A biweekly mortgage is designed to enable borrowers to make mortgage payments every two weeks instead of the traditional monthly schedule. In a year, this equates to 26 half payments or 13 full payments—effectively one extra month's payment—allowing you to accelerate your loan payoff.
How Biweekly Payments Work
To illustrate how biweekly mortgage payments function, let's say your monthly mortgage payment is $1,200. With a biweekly plan, you would make two $600 payments every two weeks. By the end of the year, you'll have made the equivalent of 13 full payments.
Advantages of Biweekly Mortgages
Faster Loan Repayment: Making one additional payment per year can significantly reduce the mortgage term. For instance, if you have a $200,000 mortgage with a 30-year term and 5% interest, adopting a biweekly mortgage could lead to the loan being paid off in just 25 years—five years earlier than with a traditional monthly payment plan.
Interest Savings: With a biweekly mortgage, you'll save considerably on total interest costs over the life of the loan. Using the same example as above, a biweekly mortgage could save you approximately $36,000 in interest compared to a traditional mortgage.
Quicker Equity Building: Building equity in your home—the portion you own—is expedited with biweekly payments. This equity can be used for home improvements or other purposes, providing added financial flexibility.
Disadvantages of Biweekly Mortgages
Payment Processing: Some mortgage companies hold the first payment of each month and combine it with the second payment before sending the total to the lender. While this might slightly negate the advantage of a biweekly mortgage, it still helps you make an extra payment annually.
Fees: Certain lenders or mortgage companies may charge fees to set up a biweekly mortgage to offset potential lost interest due to early loan payoff.
Commitment: Biweekly mortgages require a firm commitment to making payments every two weeks, which may not be suitable for everyone. Consider your financial situation and ability to maintain the payment schedule.
Biweekly Mortgage vs. Bimonthly Mortgage
It's crucial to differentiate between biweekly and bimonthly mortgages. A biweekly mortgage involves 26 payments per year, while a bimonthly plan requires 24 payments annually. Opting for biweekly payments allows for two extra payments per year, maximizing interest savings and accelerating loan payoff.
Creating Your Own Biweekly Mortgage
If you want to enjoy the benefits of a biweekly mortgage without incurring additional fees, you can replicate the payment structure on your own. Making payments every two weeks and ensuring they're applied immediately can yield interest savings. Alternatively, setting aside a twelfth of your monthly payment each month and making an extra payment at year-end can achieve similar results.
The Power of Biweekly Mortgages
In conclusion, biweekly mortgages offer a practical way to save on interest costs and become mortgage-free sooner. Before committing to this payment plan, carefully assess your financial situation and consult with your bank or mortgage company to ensure biweekly mortgages are available and suitable for your needs. By taking advantage of the potential benefits and planning ahead, you can pave the way to a brighter financial future.