Should You Be Making Bi-Weekly Mortgage Payments?
Signing up for a mortgage, the default arrangement is to use monthly payments. For some homeowners, they’ve found a way to pay less in interest and pay off their mortgage faster by switching to bi-weekly payments.
Why Homeowners Switch to Bi-Weekly Mortgage Payments
Monthly mortgage payments equate to 12 payments per year. That’s easy to see. A bi-weekly payment schedule means you’re splitting your monthly payment in half and every two weeks, that’s the payment you make.
There are 52 weeks in a year. This works out to 26 bi-weekly payments. Add it up and that’s equivalent to 13 monthly payments per year. This is how you pay less interest and lower your principal balance at a faster pace.
How Much Money Can You Save on Bi-Weekly Mortgage Payments?
Let’s use a 30-year fixed loan of $250,000 with a 4% interest rate as an example. Once this mortgage is paid, a homeowner would have paid many thousands of dollars in interest. This is unavoidable regardless of what your payment schedule is.
On a bi-weekly mortgage payment arrangement, however, the homeowner pays off the mortgage in five fewer years and saves almost $30,000 in interest payments.
If you have bought or are buying a home in Toronto, you probably have a loan far exceeding $250,000. All in all, that’s loads of interest you avoid paying and you end up owning your home faster. All that just by moving to bi-weekly payments.
What if My Lender Doesn’t Offer A Bi-Weekly Payment Option?
Some lenders can be difficult when it comes to negotiating a payment schedule that isn’t a month. If your lender isn’t offering a bi-weekly payment option, you can do it for yourself. Here’s how.
Take the amount of a monthly mortgage payment and divide it by 12. Then, make an extra principal-only payment of this amount every month. This works out at the end of the year to the equivalent of the extra you’re paying annually on a bi-weekly schedule.
The only other thing to beware of is to confirm with your lender there aren’t any prepayment penalties and to also confirm the extra payments will be applied to the principal and not your principal-plus-interest.
What Do Your Finances Allow?
Interest on a mortgage is always a killer. Most homeowners try not to think about how much compound interest they would have paid by the end of a loan.
If you can afford to make bi-weekly payments, it’s well worth considering. For some extra investment towards the front-end of your mortgage agreement, it works in your favor near the back-end. You gain a lot.