By Kali Hawlk
You don’t need a third party to help you pay off your mortgage early.
Traditionally, your mortgage payment is a monthly cost. You submit your payment once a month to the mortgage company, and your money is applied to principal, interest, and escrow. But many mortgage lenders also offer biweekly mortgage payment plans that allow you to pay in installments every two weeks instead of every month. Biweekly payment plans sound simple and straightforward: You pay biweekly instead of monthly plan and reduce the balance on your loan faster. In theory, by using one of these plans, you pay less interest over time, build equity faster, and get rid of your mortgage ahead of schedule.
So if you live in a pricey market like California and want to pay down the mortgage on your Middleton, CA, real estate a biweekly payment plan may sound like an appealing option. But before you sign up for one, it’s important to understand the pitfalls — and consider whether putting this concept to work on your own makes more sense.
Should I sign up for a lender-sponsored biweekly mortgage payment plan?
Unfortunately, these mortgage payment plans don’t always work as well as they claim. What actually happens is that you send in your biweekly payment to the company servicing the loan, and then they hold your payment until the second one arrives. Only after the company has the full monthly payment amount do they apply the money to your mortgage — which means as far as the mortgage company is concerned, you’re still making one payment per month.
In effect, this saves you nothing in interest because your funds are still only being applied as if you were making monthly payments. Worse still, some biweekly mortgage payment plans can actually ending up costing you more money, because the companies that offer these plans often charge additional fees to handle and deliver the payments for you.
If they don’t help pay off a mortgage early, why do these payment plans exist?
Considering the potential costs for the borrower, it may seem silly for lenders to even offer this plan. What’s the point if using the payment plan is no different than if you paid on the regular monthly schedule? Consider this: Most lenders who originate loans don’t actually service those loans. A third party handles the payment and the processing. But that doesn’t mean you can’t make a plan to pay down your mortgage loan ahead of schedule. You just don’t need to set it up through a lender-originated plan.
How can I pay off my mortgage early on my own?
There’s nothing wrong with the idea of paying extra on your mortgage and accelerating the rate at which you pay off the loan. You can make extra payments at any time, and you can do so in a variety of ways. Consider adding a little more to each monthly payment you make to help pay off the mortgage early. If you know you have an extra $100 in your budget each month, tack that on to your payment. For example, on a $100,000 loan (assume a 30-year fixed mortgage and 4% interest), paying an extra $100 a month can cut approximately 8.5 years off the life of the loan — and save $22,463.76 in interest. That’s some serious cash.
Another option? Create your own biweekly payment plan. By skipping the third-party processing (and the fee they add on for doing so), you’ll end up making an extra payment each year that you wouldn’t make if you paid monthly. You can also continue to pay monthly but make one extra mortgage payment at some point during the year to get the same result. Anytime you have extra money on hand — from a tax return, bonus from work, or gift — you can apply these funds to your mortgage too.
Just be sure that any extra payments you make are applied to the principal of your loan, not just the interest. This ensures you’ll actually receive the full financial benefit of paying extra toward your mortgage and be on track to pay off the loan early. You’ll also want to ensure that the terms of your mortgage will not leave you with a prepayment penalty should you pay extra or early.