Did you know that by paying a mortgage bi-weekly you can condense a 30 year mortgage to 24 years? Many consumers spend thousands of dollars extra on interest, which they could spend otherwise, or invest for their retirement. If you would like to investigate this valuable personal finance tool, talk to your lending institution about your options. Here’s what you need to know:
Why Bi-Weekly Payments?
They eliminate your debt faster by paying half of your monthly mortgage payment every two weeks. There are 52 weeks in the year, so at the end of the year you will have paid the equivalent of 13 monthly payments instead of 12. This will take years off your mortgage, and because you are putting more money towards the principal, you pay less interest.
Prepaying on the principal
There are a couple of options. If your mortgage has a prepay provision, you can simply apply more money towards your principal each month. Technically this isn’t a bi-weekly mortgage, but the same rules apply; the more you pay towards your principal, the faster your mortgage will be paid, and you will pay less interest. This is a good option if you are already maximizing your contributions to a tax advantaged retirement account, and you have the income to invest in your home.
Refinancing your mortgage
The 2nd option would be to talk to your bank about refinancing your mortgage. This will require a new mortgage, which will mean closing costs, but you will save in the long run. This is an excellent option if you have equity in your home, and you would like to pay down some higher interest debt, or invest in updating your home.
Bi-weekly payments are a great way to pay off your debt faster without noticing much difference in your monthly payments. They also work on your other debts, including credit card debt, and car loans. It is important to read the fine print and make sure that your lender will apply the payments towards the principal, instead of the next months interest. Take the time and discuss it with your lender. You could save thousands, perhaps even hundreds of thousands of dollars in interest.