Biweekly Payments Vs. Monthly Payments
When searching for a home loan, there are several options to choose from concerning how you will pay back the borrowed funds. Some repayment options are based on the length of repayment or type of interest rate, but have you ever considered making these payments more frequently? Specifically, on a biweekly basis? If this sounds like an option to consider for your mortgage, this article will focus on biweekly payments against monthly payments.
Biweekly payments are made every two weeks and usually amount to half of the number of monthly payments. You may think that these payments just spread out the monthly payment, yet this is not the case. They can pay off a loan more quickly and save the borrower money on interest.
How is this? The term “biweekly” does not always imply twice a month. They are made every two weeks for 52 weeks a year, which amounts to 26 half-payments, the equivalent of 13 monthly payments. Before going down the route of making biweekly payments on your mortgage, consider all working factors to know if it’s the right option for you.
Are They Doable?
Since your mortgage holds higher priority than your other recurring expenses, we suggest taking a step back to think about your current financial situation against the unknown future. Since it’s near impossible to know exactly where you’ll be in a few years, you should consider all possible changes or disruptions that may happen later down the line.
Analyzing your current financial situation, ask yourself a few questions: how much savings do you have? When did you start your current job? Are you in a position to pay double the number of monthly payments while still having a sufficient amount left over for other expenses?
Asking yourself these questions allows you to be open and transparent about the feasibility of making payments quicker. Just because you’re in a position where you can increase the frequency of payments on your mortgage doesn’t always mean it’s the best approach. With almost every decision regarding a loan, there is always some risk involved that could turn an ideal situation into a financial nightmare.
If you’re unable to make this decision, check in with your mortgage lender to see if they can offer any advice or suggestions that align with your financial goals. An experienced mortgage lender may share similar experiences and calmly provide sound advice, having your best interests at heart.
Pros and Cons
Doubling the frequency of your payments appear to be the best way to pay your mortgage off faster, but is there a catch to it? Purchasing a home is regarded as one of the most valuable transactions in your life, making adjusting your payments a careful decision. In other words, you should be fully aware of all the pros and cons of biweekly mortgage payments.
The Pros
Pay off your mortgage faster. Addressing the most obvious benefit, you have the opportunity of paying off your mortgage faster. Since there are 52 weeks in a year, semiweekly payments equate to a total of 26 payments toward your mortgage. If you divide this amount by 2, you are making 13 monthly payments rather than 12 payments with the standard repayment schedule.
Reduce your mortgage interest. Let’s say your $300K mortgage has an interest rate of 3% for 30 years, your standard home loan example. With monthly payments, the total amount you’ll pay in interest is around $155K. By making partial payments, you may be able to reduce this total amount of interest paid by thousands of dollars.
Make smaller, easier payments. In some cases, making smaller, easier is less of a financial burden than making a large monthly payment. Some people find paying a large sum at the beginning of each month intimidating, making the concept of partial payments easier to bear and adjust to.
The Cons
Less spending money. In the long run, making more frequent payments on your mortgage can save you thousands of dollars. In contrast, this concept in the short run means having less spending money for other expenses. As mentioned, analyze all costs included in your monthly budget to decide if you can splurge a little extra on your mortgage.
Possible prepayment penalty. Though this doesn’t apply to all mortgages, some lenders will charge the borrower if they pay off the loan sooner than indicated in the repayment plan. Pay close attention to this penalty charge when reading through your loan documents. You can also contact your lender and confirm this charge to avoid any surprises.
Possible extra fees. Depending on your mortgage lender, adjusting your current payment plan is not as common as you would think. In a situation where your lender doesn’t provide such a plan, you can also reach out to a third-party company to configure it for you. Be aware, though, as many of these companies are known to charge extra fees for this service, making the cons of biweekly payments outweigh the pros.
When Would I Start Making Payments?
A biweekly schedule will reduce the principal and save money on interest with the extra payment put toward the mortgage, so when should you make your first payment? A common misconception is that the first biweekly payment is made immediately, reducing the principal and saving you more money on interest than a monthly payment. However, this is not the case. This concept is almost similar to making your first mortgage payment with a standard repayment schedule, with the first payment not being made immediately.
For almost all payments, the first payment is held until it can be combined with the second payment to be submitted as if it were a monthly payment. Even though paying your mortgage payment more frequently can save money because they put more money toward the principal, it does not accelerate principal reduction as some would have you believe.
Finding A Schedule That Works
While the idea of paying off your mortgage faster seems like the obvious route, many borrowers fail to educate themselves on how to make these payments effectively and without hidden fees. There are various factors to review when considering a biweekly repayment schedule. As mentioned, third-party services and lenders that offer the repayment schedule may charge upfront and even monthly fees for this service. These charges can outweigh the benefit of using a biweekly payment schedule, so be sure to look at all aspects of your repayment schedule to see if you will have any penalties or extra fees for this method.
If you cannot find a biweekly repayment schedule that works in your favor, consider taking a do-it-yourself approach by making an extra annual payment. Since any additional funds sent with a mortgage payment go directly to paying off the principal, this is best done by increasing your monthly payment.
For example, if your monthly mortgage payment was $1,500 per month, to find how much you would need to pay each month to make the equivalent of extra annual payment, you would divide 1500 by 12 to get the additional monthly payment amount of $125. To explore how much you would save with a biweekly payment, input your scenario in our mortgage calculator. Before you pay ahead on your loan, always double-check to ensure that it does not have any prepayment penalties.
Explore Your Options
Biweekly repayment plans can be a great way to make your payments more manageable and to pay off your mortgage more quickly, but only if you can find the option without additional fees. A DIY approach toward making an extra payment each year can be more preferable because it is not tied to a contract and can be skipped in the event of an emergency.
Are you curious about how paying a little more per month will reduce your loan repayment timeline? There are many strategies to pay off a home loan more quickly. If you’re interested in the repayment plans that we have here at RWM Home Loans or if you’re interested in developing a strategy, contact us and we can explore your options.
