If you search for “bi-weekly mortgage” with an Internet search engine, you will be overwhelmed by the number of companies offering “Bi-weekly Mortgage Reduction Services” or “Bi-weekly Savings Programs.” Beware, you are entering dangerous waters.
Beware of Bi-Weekly Mortgage Reduction Services and Savings Programs
These “Reduction Services” and “Savings Programs” are charging you fees to “make a bi-weekly mortgage payment” for you. The enticement is that they will save you an impressive amount of money on your mortgage and reduce the number of years you pay on your mortgage.
The enticement is that they will make bi-weekly mortgage payments for you.
The real story
They’re not actually making bi-weekly payments on your mortgage. They’re making bi-weekly deductions from your bank account. These funds are placed into an account from which your monthly mortgage payment is made (which only takes 24 deductions – but during the course of a year 26 deductions will be made from your account). With the extra 2 deductions, the “Service” makes an additional mortgage payment. In other words rather than making 12 mortgage payments, 13 payments are made.
The enticement is that they are providing a special service to you that would either not be possible for you to get on your own or that you won’t have the time or discipline to make it happen.
The smarter approach
You can easily make an additional mortgage payment each year. A simple way to do this is to have your mortgage payment automatically deducted from your account each month with an additional 1/12 payment to be applied to the principal amount. At the end of 12 months, you will have made an additional payment. And you won’t have to pay any fees to a “Service”.
Save Big on your Mortgage
There’s a simple trick to significantly reduce the length of your mortgage and save you thousands of dollars in interest: Make additional payments that go toward the principal. Borrowers employ various techniques to meet this goal. Making one extra payment one time a year is probably the easiest to arrange. But many people can’t swing this huge extra payment, so splitting one additional payment into twelve additional monthly payments works as well. Finally, you can pay half of your mortgage payment every other week. These options differ a little in reducing the total interest paid and reducing payback length, but each will significantly reduce the length of your mortgage and lower your total interest paid.
Additional One-time payment
Some people can’t manage extra payments. But it’s important to note that most mortgage contracts allow you to make additional payments at any time. You can take advantage of this rule to pay down your principal any time you come into extra money.
If, for example, you were to receive a surprise windfall five years into your mortgage, you could pay a portion of this windfall toward your loan principal, resulting in significant savings and a shorter loan period. Unless the mortgage loan is very large, even a few thousand dollars applied early can yield huge benefits over the life of the loan.