You’re considering a bi-weekly mortgage payment plan for your new home. That’s a great idea, as it can potentially save you thousands of dollars over the life of the loan and help you pay off your mortgage faster. However, like any financial decision, it’s important to weigh the pros and cons before you make a decision.
Advantages of Bi-Weekly Mortgage Payments
Here are some benefits that you should know about:
- Shorter loan term: By making half payments every two weeks instead of a full payment once a month, you will make one extra payment each year, which can help you pay off your mortgage faster.
- Lower interest payments: The more frequent payments reduce the amount of interest you’ll pay over the life of the loan. This is because the principal balance will be reduced more quickly with bi-weekly payments.
- Easy budgeting: If you get paid bi-weekly, this payment schedule might be more convenient for you and align better with your budget.
- Increased Equity: By paying down the principal faster, you’ll build equity in your home more quickly.
- Improved Credit Score: By making payments on time, they can positively impact your credit score.
Disadvantages of BiWeekly Mortgage Payments
Here are some drawbacks you should be aware of:
- Additional fees: Some lenders charge a fee to set up bi-weekly payments, which can add up over time.
- Automatic draft required: You’ll need to authorize an automatic draft from your bank account, which some people may not be comfortable with.
- May not save much: Depending on the interest rate and loan term, the savings from bi-weekly payments may be minimal. You can use a mortgage calculator to estimate the potential savings.
- Lack of Flexibility: These payments can be less flexible compared to monthly payments, as you may have to pay the same amount every two weeks regardless of your financial situation.
- Complexity: Understanding the payment system may be more complicated compared to the traditional monthly payment system
Let’s say you have a 30-year, $200,000 mortgage with an interest rate of 4%. If you make monthly payments, your total interest payment would be $184,674. But, if you opt for bi-weekly, your total interest payment would be $164,859, a savings of $19,815 over the life of the loan.
Should You Choose a Bi-Weekly Mortgage Payment?
It depends on your financial situation and comfort level. Consider your budget, financial goals, and fees associated with bi-weekly payments before making a decision. It may also be beneficial to speak with a financial advisor to determine if this payment plan is right for you.
Frequently Asked Questions
Q: How does a biweekly mortgage payment plan work?
A: With this payment plan, you make half payments every two weeks instead of a full payment once a month. This results in an extra payment each year and can reduce the loan term and interest payments.
Q: Can I switch back to a monthly mortgage payment plan if I choose a bi-weekly plan?
A: It depends on your lender’s policies, but most lenders allow you to switch back to a monthly payment plan if you choose. It’s best to check with your lender for specific information.
Q: Are biweekly mortgage payments required by law?
A: No, these payments are not required by law. It’s a personal choice for homeowners to make.
Q: Is it better to pay bi-weekly or extra payments on a monthly mortgage plan?
A: It depends on your individual financial situation and goals. You can use a mortgage calculator to estimate the potential savings with thesepayments and compare it to making extra payments on a monthly plan.
Q: Are there any tax benefits with bi-weekly mortgage payments?
A: No, there are no specific tax benefits associated with these payments. However, paying down the mortgage more quickly can increase your equity in the home and potentially reduce your overall tax liability. It’s best to consult a tax professional for specific information.
Q: Can I make extra payments with a biweekly mortgage plan?
A: Yes, you can make extra payments on top of it if you choose. This can help you pay off your mortgage even faster.
Q: How do I switch to a bi-weekly mortgage payment plan?
A: You can contact your lender and ask if they offer this payment plans and if there are any fees associated with setting it up. They will guide you through the process.