By Tali Wee of Zillow
Paying off a mortgage can be overwhelming for homeowners. Many options and recommendations exist for homeowners who want to pay their principal faster than the terms of their loan in order to save money on interest. Although savings are desirable, paying more than the mortgage payment isn’t feasible for all homeowners. In fact, just paying the monthly mortgage can be challenging for some. Many homeowners enroll in bi-weekly payment programs to assist in paying their mortgages promptly, with extra funds toward their principals and less stress.
Interest is the price homeowners pay for borrowing money to purchase their homes. For the first several years of the loan, the majority of monthly mortgage payments go directly toward paying off interest. In order to get out of debt sooner, it’s most impactful for homeowners to pay extra funds toward the balance of their principals during those beginning years. The faster the principal is paid, the less the homeowner pays in interest, reducing the overall cost of homeownership. One way to pay the principal off faster is to pay two half-payments every two weeks, rather than a full payment each month.
What Is a Bi-Weekly Payment Program?
Bi-weekly payment programs are offered by lenders, loan servicers and third-party services to collect mortgage payments every two weeks, rather than monthly. Each payment is for half of the monthly mortgage cost. Splitting the mortgage into two smaller payments can be more feasible for some homeowners.
Enrolling in a bi-weekly payment program is not free. These programs generally cost an initial fee for activation and then an additional fee upon payment every two weeks. The enrollment fees range anywhere from $150-$500 and payments cost $5-$20 each.
What Are the Benefits of Bi-Weekly Payment Programs?
Despite the cost, bi-weekly payment programs are more manageable for some homeowners. The payment schedule corresponds with standard paycheck schedules. These programs work well for homeowners who don’t excel at budgeting, have little expendable income or struggle remembering to pay their mortgage on time. As money is earned it’s sent to the lender, without the risk of overspending before the mortgage is due.
Most bi-weekly plans require automatic fund transfers to prevent late payments. These scheduled electronic transfers assist homeowners to stay on track with their mortgages, prevent late fees and protect their credit.
Bi-Weekly Payment Programs Reduce Interest Costs
Because bi-weekly payment programs require half-payments every other week, homeowners end up making 26 half-payments each year. Compared with the traditional 12 monthly payments, bi-weekly mortgage payers make 13 full payments per year. The additional full payment goes directly toward paying down the mortgage’s principal. The sooner and faster the homeowner pays the principal, the less overall interest is paid. Also, making one additional payment toward the principal each year can decrease the length of the loan by years.
Is a Bi-Weekly Payment Program a Good Option?
The choice to enroll in a bi-weekly payment program is heavily related to a homeowner’s payment preferences, circumstances and financial priorities. The decision to pay off a mortgage early is the primary indicator of bi-weekly payment plans being selected by homeowners. Borrowers have numerous opinions revolving around the choice to pay off a mortgage ahead of schedule. If getting out of debt and paying off the mortgage as soon as possible is a top priority, then perhaps a bi-weekly program is perfect to help manage that goal. However, if the homeowner has multiple other financial goals to focus on, then bi-weekly payments may not be the best use of their money. Some factors that may influence a homeowner to not pay the mortgage off ahead of schedule are: student loan debt, savings for children’s education, plans for short-term homeownership, low income, low interest rate or more lucrative investment options.
Alternatives to Bi-Weekly Payment Programs
If homeowners decide not to pay off their mortgages early, they may still benefit from making reduced mortgage payments twice a month. Some loan servicers accept two half-payments each month, free of charge. These are not considered bi-weekly payment programs and do not accumulate an additional mortgage payment per year. If smaller payments upon payday are more feasible than one large monthly payment, check to see whether the loan servicer allows such arrangements.
Homeowners who are interested in paying off their mortgages early should consider alternatives to bi-weekly payment programs. Simply make an extra payment directly to the principal balance each year. When homeowners receive unscheduled income such as a commission check or tax refund they can apply it toward their principal without previously arranged savings plans.
Another method is to pay 1/12th of a monthly payment in addition to each month’s payment. This additional payment adds up to one extra full payment per year. The sooner the principal balance reduces, the less total interest is paid. Therefore, 12 small additions monthly are more beneficial than one full payment at the end of the year.
To avoid the costs of an official bi-weekly payment program, homeowners can devise their own bi-weekly system. Create a savings account and transfer half of a monthly payment to it with each paycheck. When the full mortgage payment is due, write a check out of the savings account. This financial management plan can eliminate the stress of budgeting for homeowners choosing to pay on or ahead of schedule. An automatic payment plan can be arranged with most loan servicers to avoid late payments.
The decision to use bi-weekly payment programs should be made by the individual homeowner with all financial priorities and options considered.