Discovering the Benefits of Bi-weekly Mortgage Payments
To appreciate the power of a bi-weekly payment schedule, it helps to review the numbers. Consider this: There are 52 weeks in a year. That means you’ll make 26 bi-weekly payments in a year. Each payment will be equal to one-half of a normal mortgage payment. So, you’ll make 13 payments when you pay bi-weekly. That’s one extra mortgage payment each year. It should come as no surprise that an extra mortgage payment can provide some significant benefits.
1. You Will Match Your Loan Payments to Your Pay Days
Are you paid on a weekly or bi-weekly basis? As Credible points out, shifting to a bi-weekly mortgage payment can make budgeting much easier because it creates a natural match between your home loan payment and your paycheck. Instead of having to remember to set aside a portion of your paycheck in order to have enough to pay a large monthly bill, you’ll naturally have smaller bills that come in as your paycheck does.
2. You Will Build Equity Faster
Equity is the portion of your home that you own. As Investopedia notes, paying down your home loan helps you build equity faster, and bi-weekly loan payments are a fantastic way to do that. After all, you’re making an extra payment, and you can request that the extra payment be put toward the principal. Having home equity has major advantages. Homeowners can borrow against it to fund home improvements and other goals.
3. You Will Pay Less in Interest
Mortgage payments are divided between principal and interest, and it isn’t an even split. Thanks to a process called amortization, most of the payment goes to the interest in the early years of a loan. As MagnifyMoney explains, bi-weekly payments are still helpful. You can indicate that the extra payment should go toward the principal balance. Paying down the principal balance means there is less of a balance to accrue interest. As a result, you’ll pay less in interest. Over time, this can produce substantial savings.
4. You Will Shorten Your Loan Term
Is the idea of owning your home free and clear faster appealing? Bi-weekly payments might help you achieve that goal. After all, you’d be making 13 monthly payments each year, which speeds up the repayment process. According to Ramsey Solutions, this could help you pay off a 30-year loan in 26 years, depending on the interest rate. That’s four years ahead of schedule.
5. You Will Be Able to Drop Private Mortgage Insurance Sooner
Private mortgage insurance (PMI) is typically demanded of homeowners who use conventional loans but make down payments of less than 20 percent. PMI adds to the cost of your mortgage payment while protecting your lender’s interests, so it’s no wonder that homeowners are eager to ditch it. As MagnifyMoney notes, achieving at least 20-percent home equity is the key, and bi-weekly mortgage payments can speed your efforts to build home equity. Therefore, paying bi-weekly may also allow you to wave farewell to PMI payments sooner.
Things to Watch Out For When Considering Bi-weekly Payments
The benefits of bi-weekly payments are certainly attractive, but this option isn’t for everyone. As The Balance reports, you’ll want to check that your lender is okay with a bi-weekly payment plan. Some don’t offer these payment plans, and trying to create your plan can lead to confusion that may cause trouble for your credit. Are you thinking about using a third-party vendor to make your payment? Be wary. There are lots of scams. It’s also smart to check whether your home loan has a prepayment penalty clause. Finally, you’ll want to verify that your finances are ready to make the switch to bi-weekly payments. What if bi-weekly payments aren’t a great fit? You can still add a little extra to your regular payments or make lump sum principal payments whenever you have extra funds.
Do you have questions about the benefits of bi-weekly mortgage payments? Are you eager to discover what type of home loan is the best fit for your housing goals? The home loan experts at PrimeLending Dallas are ready to help you explore your options. Contact us today.