Once you have made the initial foray into the different types of mortgages available and have decided whether a traditional 30-year fixed-rate or adjustable-rate mortgage suits you the best, your decisions are not over. The payment plan that you choose can make a big difference in how much you pay for the privilege of having that mortgage and how long you will be making payments on it.
Lenders typically structure repayment of mortgages through monthly payments, with a portion of each payment going toward paying down the original loan balance and the remainder going toward interest. Some lenders structure mortgage loans with biweekly payments -- with one payment due every two weeks -- rather than the more traditional monthly payments. Regardless of which type of repayment schedule you choose, a complex technique called amortization recalculates the loan after each payment. In each subsequent payment, an increasingly larger amount is applied toward paying down your principal balance.
Benefits of a Biweekly Mortgage
You might expect biweekly payments to equate to two payments per month or 24 payments per year. Some months, however, are made up of four weeks and others five, resulting in 26 annual payments with a biweekly mortgage. Those extra weeks are roughly the equivalent of an extra month's payment each year. Although making extra payments on your mortgage is the best way to shorten the length of the loan and reduce interest paid, a biweekly mortgage makes those extra payments mandatory.
Benefits of a Monthly Mortgage
If you are not prepared to commit to a schedule of additional mortgage payments and, if you already have a monthly mortgage and want to avoid the extra fees for refinancing to a new biweekly mortgage, a monthly mortgage that allows you to make optional additional payments of principal when you are able to might be the better choice. You can still accelerate repayment of a 30-year mortgage with monthly payments by making additional payments towards the principal when you can afford them.
The Bottom Line
Before you sign on the dotted line, evaluate your current financial situation and how you expect it to change in the future. Sit down with a good mortgage calculator program and work out all of your options. Start with a baseline of a typical 30-year fixed-rate mortgage and compare that to a biweekly mortgage, a mortgage with a shorter term and lower interest rate, or a plan of making additional payments throughout the year until you find the plan that is right for you.
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