How can I set up bi-weekly mortgage payments?
You can often set up bi-weekly mortgage payments simply by contacting your lender and telling them you want to do so. The vast majority of mortgage lenders have a bi-weekly mortgage payment program available for borrowers. However, there can sometimes be a small setup fee and direct ACH withdrawal is often required.
If your mortgage lender does not offer bi-weekly payment options, all is not lost. You can either refinance with a company that does offer biweekly payment plans, assuming it is financially advantageous for you to do so, or you could go to a third party company that will handle bi-weekly payments for your current mortgage. For a fee, some companies will collect payments every two weeks and put them into an account so that they can make one extra payment for you each year.
Another option is to simply stay on your current payment plan and add about 10 percent to each monthly payment. This accomplishes the same thing as paying bi-weekly mortgage payments.
What are the advantages of paying your mortgage bi-weekly?
By paying your mortgage bi-weekly, you are in essence making one extra monthly payment per year. This is because a month is not exactly four weeks, and all those extra days in each month add up to four extra weeks, or one extra month. Paying every two weeks will mean that you will be paying even for those extra days in the year.
Since interest is spread out over an entire year, regardless of how many biweekly or monthly payments you make, there will be no extra interest to pay with your extra payment. This means that the entire balance of this extra payment goes towards principal, which will help you pay down your mortgage much more quickly.
What other methods can be used to pay a mortgage off more quickly?
One popular way to pay off a mortgage more quickly is to refinance into shorter-term loan. Dropping from a 30-year mortgage to a 15-year mortgage, for example, can often save from a quarter to a half of a percent on the interest rate and apply more money toward principal. The downside is that the monthly payment is much bigger and you would be locked in to pay that payment each month.
One alternative to refinancing into a shorter-term loan that doesn’t carry the same financial risk is to just pay extra each month. You would not get the reduced interest rate, but you could still pay down the principal fast. If you could afford to pay 30 to 40% more each month for a shorter-term loan, you could still pay that extra 30 to 40% extra on your existing loan, all applied toward the principal. You would have the peace of mind that if times got tough; you could go back down to your regular payment.
If you can’t afford to shorten your mortgage term or pay as much extra as you would with a shorter term, you can still find other ways to whittle down your mortgage. Some people do so by applying some or all of their tax refunds, bonus checks or other unexpected cash to their mortgage principal. Others round up their monthly payments to the nearest $10, $50, or $100, every little bit helps.
What other debts should be paid off before paying a mortgage off early?
Most debts should be paid off before applying significant money to pay off your mortgage early. Your mortgage will be among the lowest interest debt that you have, so it is costing you the least to keep it. In addition, mortgage interest on your home is tax deductible, so you are getting a tax savings from that debt that you won’t get from most others.
Credit cards will generally have interest rates two or more times that of your mortgage, but sometimes you might have a promotional period with a low or nonexistent interest rate. In that case, if you’re sure you can pay the card off before the promotional rate expires, you can afford to divert extra money to your mortgage rather than paying extra on the card.
Similarly, car dealers often offer low interest rates or even zero percent interest for the life of the car loan as an incentive to buy. In this case, obviously, the car loan is costing you less than the mortgage so you should pay down the mortgage. Other exceptions like this are possible, so in general just keep in mind that you should just pay the highest interest rate first.
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