Bi-Weekly Mortgage Payments: What are they and do they work?
Whether you own a million-dollar Encino mansion or a $300k Van Nuys townhome, who wouldn’t want to pay off their mortgage 5 years early? What if I told you it’s possible, and all you need to do is send in half your mortgage payment every 2 weeks rather than the full payment each month?!?
Seems like a scam. Does it really work?
Yes. When done properly, it really works and is not a scam!
How does it work?
It’s actually quite simple. Let’s say your monthly payment is $2,000… If you pay it each month, you’re making 12 payments, totaling $24,000 per year.
With bi-weekly payments, you’re making half the payment ($1,000) every 2 weeks. Although it seems like it’s the same thing as paying $2,000 per month, since there are 52 weeks in a year, you’re making 26 payments each year for $1,000… totaling $26,000. Essentially, you’re making an extra payment each year, but tricking yourself into thinking you aren’t.
What’s the catch?
- If you’re strapped for cash, this probably isn’t for you. Even though there’s great benefit to paying off your mortgage quicker, you shouldn’t do it if you’re already having enough trouble making your regular payments.
- Your bank is probably going to force you to use a 3rd party collection service to make your bi-weekly payments, who will then charge you a fee on a monthly basis, which would probably negate a good portion of your savings.
How can I avoid the fees?
Rather than paying every 2 weeks, send your normal monthly payments plus 1 extra check each year (perhaps after you get your big income tax refund?), and be sure that the bank earmarks it for your principle. Alternatively, pay a little extra each month along with your normal payment, again being sure that the bank knows to apply it to your principle.
How much? Well, if you’re paying $2,000 per month, simply divide that by 12 months and you’re left with $167 per month. Add that to your monthly check (now totaling $2,167), and you’re basically doing the same think as a bi-weekly plan would. If you can afford to pay more, go for it! You’ll pay off your mortgage that much sooner.
If you’re thinking about moving and want to talk to an awesome real estate agent about it, contact me or call me at (310)926-2386 today!