With interest rates low for the past 18 months, bi-weekly mortgage programs or “extra payment” mortgages have become popularly advertised as a cheaper way to pay off your loan. But is it worth it to commit yourself to the extra payment every year? In this article we’ll go over three basic options you have when it comes to paying off your mortgage loan.
Option 1: Traditional mortgage
The traditional mortgage loan asks you to make 12 payments per year, one on a set date each month. Therefore, a 15-year fixed loan would require 180 payments and a 30-year fixed loan would require 360 payments to pay each loan in full.
Like almost every loan, mortgages are split into two parts: principal and interest. The principal part of your payment is shaved off the amount you owe the bank; the interest is the amount you owe the bank for loaning you money.
When you first start paying your loan, you will usually be paying more interest than principal. And as your loan nears maturity, the balance will shift and you will be paying more and more off your loan’s principal balance. This repayment schedule is called amortization.
Option 2: Bi-weekly mortgage
With a bi-weekly mortgage program, you will be making 13 payments per year instead of 12. Instead of making one mortgage payment each month, you make half a mortgage payment every two weeks. Since there are 52 weeks in a year, that equals 26 half mortgage payments annually, or 13 monthly mortgage payments.
Sounds simple enough, right? It is — except for the fact that technically you can’t make 13 payments per year on your mortgage. Mortgage interest is paid on an annual basis, and that amount is covered in your first 12 payments. But your 13th payment has to be applied somewhere, and that’s where the benefit comes in: the entire payment will be applied to your principal balance.
Will bi-weekly payments pay off your mortgage faster? In terms of basic math, yes, bi-weekly mortgages would indeed work to pay off the principal balance of your loan faster. The caveat is that your bank won’t typically allow you to just submit half your payment every other week. More than likely, they will set up a payment plan for you with an intermediary, which acts as a middleman between you and your lender. But these intermediaries come at a cost, and you will have to look into whether or not this cost outweighs any savings you might gain by making that extra principal payment each year.
Option 3: DIY
If the bi-weekly option makes sense to you, you might consider doing it yourself. This way you can manage your payments yourself, and you are giving yourself some financial freedom by not being contractually tied down to that extra money.
However, many lenders won’t allow you to just send in half your payment every two weeks. They can’t hold the payment and they won’t apply it unless the total payment dues are represented. But you can achieve the same result by making your regular 12-month mortgage payment and tacking on 1/12 of that regular payment on top. So if your traditional monthly mortgage payment in $1,200 — you would add $100 and pay $1,300 per month instead.
This way you will “overpay” your mortgage by $1,200 annually, which is the equivalent of that 13th payment. This way, too, you will not be committed to making that extra payment. If one month is tight, you can forgo the extra $100 and pay $200 the next month, or $150 for the next two months. And if your payment doesn’t correspond with the actual amount due, it’s always a best practice to make clear that the extra payment will go toward principal. That way there is no confusion about why you are paying more than the amount due.