Buzz
When making a big purchase, there’s often a strategy to try to ease the financial burden. Some methods are more effective than others.
The idea behind biweekly mortgage payments seems simple at first: Rather than paying monthly (12 times a year), you pay biweekly (26 times a year), which adds up to 13 monthly payments. It's all about the math.
But sometimes, it doesn't quite work out as expected.
Most home mortgages have interest calculated on a monthly basis. So, when you divide your monthly payment into two, it doesn’t speed up the reduction of your principal more than the interest adds up. Typically, your mortgage lender will hold onto your partial payment, wait for the second one, and then apply the full amount.
To make matters worse, some mortgage providers and so-called industry 'disrupters' impose a fee to get you onto a payment plan that’s more frequent than monthly. I saw one that charges a $399 enrollment fee, with others charging monthly fees.
While making two smaller payments instead of one big one may feel rewarding, it won’t speed up your mortgage repayment much. An extra payment annually might reduce your mortgage term by two or three years, but it’s certainly not worth paying fees for.
Instead, take control and accelerate your mortgage payoff on your own terms.
If you like the idea of making smaller payments, there’s no harm in making an extra payment when you have a windfall or simply find some extra $20s in your budget for the month.
Alternatively, you could save up in a separate account and make a larger lump sum payment at the end of the year.
Whenever you make an extra mortgage payment, no matter how big or small, be sure to specify that it goes toward the principal. This will help reduce your interest payments over time as you chip away at the balance.
Although I don’t personally have a mortgage, I spent some time experimenting with mortgage payment calculators using real figures provided by a family member (the ultimate homebuying reality check). My favorite is Bankrate’s additional payment calculator, which considers the original mortgage amount, loan term, and extra principal payments to compare your payment timelines. If the savings on interest alone don’t motivate you to speed up your payments, seeing your loan payoff timeline shorten may push you into action.
Of course, if you plan to stay in your home for 30 years, you may not mind paying the same amount each month and be content with the regular payments. But for the overachievers among us, it’s better to make extra payments yourself rather than paying someone else to do it for a premium.
