Mortgage Payments Twice a Month Won’t Save You That Much Money
For every major purchase you have to pay, there is a trick to try and make it less painful. Some work better than others.
The thought process behind bi-weekly mortgage payment plans seems logical at first glance: instead of paying 12 times a year (monthly), you pay 26 times (every two weeks), which equates to 13 monthly payments. Mathematics! It’s great.
Except when it isn’t.
Most home mortgages have a monthly accrued interest. That way, when you split your monthly payment in two, it doesn’t reduce your principal any faster than interest is calculated. Instead, your mortgage company usually holds your half of the payment, waits for the other half to arrive, and then applies the full payment.
Even worse, some mortgage companies and industry breakthroughs charge you to get you on a payment plan that runs more frequently than monthly. One I saw that there was a $ 399 registration fee; some charge a monthly fee.
So while it may seem nice to make two small payments instead of one big one, it won’t help you pay off your mortgage as quickly. One additional payment per year can cut your mortgage by two or three years, but it’s definitely not a privilege worth paying for.
Instead, shorten your mortgage repayment terms as you see fit.
If you like the idea of paying less, there is nothing wrong with making an extra mortgage payment when you have a little windfall or just find a few extra $ 20 in your monthly budget.
Alternatively, you can hide the funds in a savings account and make one additional larger payment at the end of the 12 month period.
Whenever you make an additional payment on a mortgage, large or small, be sure to note that the payment must be applied to the principal. This will diminish your interest over time as you hide that balance.
I don’t have my own mortgage loan, but I did spend some time playing with mortgage payment calculators using real numbers provided by a family member (the best reality check when buying a home). Most of all I like the calculator extra payments Bankrate , which takes into account the original amount of the mortgage, the mortgage term and extra principal payments, so you can compare the timing of payments. If saving on interest alone isn’t enough to motivate you to speed up mortgage payments, shortening your mortgage payments may be a motivator for you.
Of course, if you plan to stay in your home for 30 years, you don’t have to worry about the surcharge and feel comfortable waiting for the same mortgage payment 12 times a year. But for those who do well in the process, do it yourself to make more frequent or larger mortgage payments rather than doing it for an additional fee.
This post was originally published on 03/10/10 and updated on 06/13/19.