Key to Cutting Your Mortgage? Pay Bi-Weekly

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Paying your mortgage once-a-month versus twice-a-month is not a new concept, but it's one that homeowners should consistently examine.

If you can afford to, paying twice a month can shorten the length of your mortgage, while providing significant savings on your total loan interest rate. On the other hand, not everyone can handle two mortgage payments a month, and banks may claim hefty fees if you decide to do so.

Let’s take a new angle on an old subject. On the surface, paying your mortgage every two weeks — at half your total mortgage payment each time you cut a check (or pay online) — is pretty clear cut: you’re writing 26 checks constituting "half-a-payment," thus amounting to 13 payments per year (as opposed to 12 under both the once-a-month and 24 (12 x 2) twice-a-month payment arrangements).

In other words, by paying “halfsies” on your mortgage every two weeks, you’re making an extra monthly mortgage payment every year. The extra cash from paying every two weeks is earmarked directly toward paying down your loan principal, thus driving down the total interest owed on your mortgage loan. And the more payments you make every year, the shorter your “mortgage payoff” timetable.

Make no mistake, the savings can be substantial.

To prove that point, let’s conduct an experiment. We’ll assume the following mortgage payment scenario:

  • Total mortgage = $150,000
  • Total timetable = 360 months
  • Interest rate = 6%

Given those numbers:

  • The total monthly payment (including principal) = $899.33.
  • The total interest over the life of the loan = $173,757

By adopting a bi-weekly mortgage payment schedule, you’d get the following:

  • Bi-weekly mortgage payment = $449.67
  • New total interest over the life of the loan = $135,294.

Roughly calculated, that means you’d pay off the entire loan not in 30 years, but in 24 years.

A few caveats. Most likely, your mortgage lender will balk at setting up bi-weekly payments. It costs them money to process 26 checks a year instead of 24. So they may likely nickel-and-dime you on fees to provide such a service. Your best move here? Offer them direct deposit every two weeks, where they take the money right out of your bank account electronically. The fee, if they slap you with one, should be lower, and banks will be happier doing business with you online (it costs them less).

Not everyone can afford to pay their mortgage — even halfway — every two weeks. But if you can manage it, the savings can be substantial.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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