When paying a mortgage, it's smart to apply any extra money that you have toward the principal payment to pay your loan off as quickly as possible. You may have heard that paying your mortgage twice a month can help you reduce the amount you pay over the life of the loan. Before you sign on, make sure you understand what you're getting into.
Twice Monthly vs Bi-Weekly
Many people confuse twice monthly payments with bi-weekly payments. In most months, the effect is similar, but there is a slight difference between the two. When you make twice monthly payments, you are paying half of your mortgage 24 times per year, for a total of 12 payments. When you make biweekly payments, you pay half of your mortgage payment 26 times, for a total of 13 payments. This extra payment each year significantly reduces your principal balance, which shortens the amount of time that you pay your mortgage and allows you to pay less overall.
Twice Monthly vs. Mortgage Payment
If you pay your mortgage twice a month -- for example on the 1st and the 15th -- you will pay off your mortgage just one month sooner than you would have otherwise. This may not make a big impact for you financially. However, if you are paid twice a month, you may find that it's easier on your budget to separate your payment this way.
When you set up a bimonthly or biweekly payment plan with your mortgage company, the company may charge you additional fees to make the arrangement. This could range from a one-time fee in the hundreds of dollars, to a smaller once-a-month fee of around $10. This may make the option less attractive to some, as traditional mortgage payments don't incur additional fees.
DIY Mortgage Acceleration
If you want to pay off your mortgage faster, you don't have to set up a program through your bank or through a mortgage acceleration company. Instead, simply send in extra money with your monthly mortgage payment. Check with your bank about the procedure for this. Some banks will allow you to add your extra payment to your regular mortgage check, specifying that the extra money should go to the principal. Others require you to send a separate check for the extra amount.
When you use the bimonthly mortgage payment method, you potentially save thousands of dollars on interest payments over the years. For example, if you have a $100,000 30-year mortgage, at rate of 6.5 percent, paying a standard monthly mortgage means you will pay $127,544 in interest during the loan period. If you go the biweekly route from the beginning, your interest is reduced to $97,215, a savings of $30,329, or more than $1,000 a year over the life of the loan.
Maggie McCormick is a freelance writer. She lived in Japan for three years teaching preschool to young children and currently lives in Honolulu with her family. She received a B.A. in women's studies from Wellesley College.