How to Convert Your Mortgage to Biweekly Payments: A Comprehensive Guide
Are you interested in converting your mortgage to biweekly payments? This article provides a detailed guide to understand how it works, the benefits and costs, and tips to avoid scams in the process.
Understanding How Biweekly Mortgage Payments Work
When you take out a mortgage, a portion of your monthly payment goes towards the principal (the amount you borrowed), while the other portion goes towards interest (the amount the lender charges for the use of that money).
The original principal remains constant, but the interest accrues over time. This means the longer it takes to pay off your loan, the more interest you will accumulate. This concept is known as the amortization process.
The principle behind biweekly mortgage payments is to accelerate your mortgage repayment. By paying every two weeks, you effectively make an extra monthly payment each year, significantly reducing the total amount of interest you pay.
Breaking Down the Biweekly Payment Process
There are 26 two-week periods in a year, which equates to the equivalent of 13 full monthly payments. For instance, if you pay biweekly, you will make 52 payments over the course of a year, which is 13 more than a typical 12-month, monthly payment plan.
It is important to note that you will not be making payments every two weeks directly. Instead, you need to follow a specific payment structure to achieve the same effect as paying biweekly. For instance, you could divide your monthly payment by 12 to determine the additional amount you should add to each payment to emulate 13 full payments a year.
Weighing the Benefits and Costs
While biweekly mortgage payments offer several financial benefits, such as saving on interest and potentially increasing your home equity, they may not be suitable for everyone. Before committing to this plan, consider the following:
Duration of Home Ownership
Ask yourself how long you plan to stay in your house. If this duration is less than six years, the extra costs of biweekly payments may not justify the benefits.
Affordability and Priority
Can you afford to make an extra payment each year? Biweekly payments require you to budget for additional money, which you might otherwise spend on other priorities like starting a business or going back to school.
Discipline and Self-Management
Do you have the discipline to save extra money each paycheck? While there are services that can handle biweekly payments for you, these services come at an additional cost. It is more cost-effective to manage these payments yourself.
Setting Up Your Biweekly Payment Plan
For successful biweekly payments, the first crucial step is to contact your lender. Ensure they do not impose penalties for early payments. Additionally, let them know that you want the extra money to be applied to the principal, not the interest.
You can manage your biweekly payments by following these steps:
Divide your monthly mortgage payment by 12 to determine the additional amount to add each month. Alternatively, make one extra full payment each year. Ensure your lender applies the extra payments to the principal.By following these steps, you can effectively pay off your mortgage faster while saving on interest.
Avoiding Scams
Be wary of companies offering to manage your biweekly payments for a fee. While they may claim to save you money, the cost of their services might outweigh the savings on interest.
These companies are unregulated, and your money is uninsured. They may not adhere to sound business practices, and there is no government agency that regularly checks on them.
To avoid this, do the following:
Contact your lender if their name is being used by fraudulent companies. They may be willing to help you set up an accelerated mortgage program. Reach out to government regulatory agencies like the Consumer Financial Protection Bureau. Violations can include: Promising savings even if payments remain the same. Claiming immediate savings, which only become significant over time. Misstating where the fees you pay will go. Pretending to be associated with your lender.By staying vigilant and understanding the details of biweekly mortgage payments, you can make informed decisions that benefit your financial health.