When you own your home and are making monthly mortgage payments, you may receive a lot of offers to obtain a home equity loan, or to refinance your present mortgage or to make the switch to a biweekly mortgage.
The bank will explain that by opting for a biweekly plan it will cut somewhere between 5 to 7 years off the length of your loan.
This would save you thousands of dollars in interest which sounds good in theory. Instead of monthly payments which most of us make, you can pay off your mortgage in bi-weekly payments.. or every other week. This method amounts to making one extra payment each year.
For example, if your monthly payment is $1400 and you make twelve equal payments, then at the end of the year you will have paid $16,800.
However, if you pay every other week, or biweekly, you will be making twenty six payments each year. This means, using the example above, that you will have paid $18,200 by the end of the year. If you choose to pay your mortgage biweekly you will pay off the mortgage and the interest on it much sooner. This will shorten the length of your mortgage, you will have it paid off much earlier and make your life easier.
By making biweekly payments, also known as an Accelerated Payment Plan.. the payments are likely to co-ordinate very conveniently with your pay periods, and it therefore all seems to make good financial sense. However, there can be a problem with this plan in that it makes more work for the bank or mortgage company in processing twice as many payments during the year.
Since banks and mortgage companies do not work for free.. in most cases, you may be charged an additional fee for utilizing the biweekly payment plan. These fees can range anywhere from $300 to $500 dollars annually, on top of which some banks may even charge you a monthly fee to process the biweekly transactions.
Here is a better and less expensive method to pay off your mortgage earlier without having to pay those extra fees that the banks charge. Using the example above, just take the $1400 and divide by twelve months.
Taking that amount of $116.67 and adding it to your payment each month will accomplish the same thing and you will still save a lot of money. Be sure to instruct the bank to apply the additional funds each month toward your principal amount.
By using this method you will have made twelve payments of $1516.67 and at the end of the amortization period will add up to $18,200.04.
Furthermore, you will pay off the mortgage that much sooner and have saved on the bank fees and service charges as well. Less money for the bank and more for you!