If you have a house that you are making mortgage payments on, you could not have failed to notice how there are always these offers in the mail that ask you if you want to choose to make biweekly mortgage payments instead of monthly ones. Those letters usually try to attract you to the idea by telling you that you could pay your mortgage off far more quickly if you choose to do it their way. Should you choose one of these? Are they a good idea?
Let us first get into how biweekly mortgage payments work in the first place. “Biweekly” does not mean that you pay your standard mortgage payment twice every month instead of just once. What fun would it be to pay twice the amount you’re paying when you can’t even afford what you are paying now?
What they want you to do is this: if you pay $500 once a month right now, they want you to split it into two and pay $250 twice a month. You’re probably wondering how that could possibly save you anything –especially since it looks like it works out to the same thing. The thing is, when you make biweekly mortgage payments, one payment goes to repaying the principal and the other goes to the interest. You’re guaranteed a way to wear down your principal right away. And that equates to lower interest bills over the life of your mortgage. And yes, this actually works.
Are you wondering how “biweekly” payments can be any different from “bimonthly”? They kind of sound like the same thing. In truth though, even if bimonthly plans do require you to pay twice a month just like biweekly plans do, the lenders only get around to applying your payments to repaying your mortgage once a month. So it works out to be the same thing.
And, of course, there’s always a downside. The biweekly plan has a couple of problems too. To begin with, signing up for such a plan can cost several hundred dollars. There can be a special charge each time you make your biweekly payment too. And then there’s the question of whether you can afford to pay extra every year.
Some people really don’t feel it’s worth the few hundred dollars extra it takes to go this way. To save on the interest they pay, they feel it could be better to use other methods available to them. For instance, if they can save enough extra money each month, they can just make extra payments and that goes to their principal.