Thursday, August 23, 2012
Will biweekly mortgage payments save you money?
Answer: Making biweekly payments on your mortgage will absolutely cut your interest cost and shorten the term of your loan, to boot. Such an arrangement usually is set up as an automatic debit from an account you specify. The mortgage lender will sweep through that account every two weeks and collect exactly half of your required monthly payment.
How does it work?
While there are only 12 months per year, there are 26 two-week periods. This means you are essentially making 13 monthly payments per year. In today's market, this can save you a bundle, especially if you start counting from the first monthly payment, because it reduces the term of a 30-year loan to about 25 years.
How much are the savings?
On a $200,000 mortgage at 5%, you'll cut the total term by just about five years, while shaving off more than $34,000 in interest cost. Biweekly payments can be valuable, but there's no magic to them. In fact, if you are responsible and dedicated, you can simply send in an extra monthly payment once per year and achieve nearly the same savings. The biweekly plan just makes it happen automatically.
That said, you should check the fine print. While it's OK for a lender to charge you a one-time setup fee, watch out for any recurring transaction fees that could diminish your savings over time.
Use a mortgage calculator to see how you can save money with biweekly mortgage (or other) prepayments.