Extra Mortgage Payments Could Save Homeowners Big Money
Did you know that you could slice years off of your mortgage just by making the equivalent of one extra mortgage payment per year? The basic rule of thumb is that making 13 mortgage payments per year (or setting up bi-weekly payments) will reduce the term of a thirty-year mortgage by about seven years.
Doing this could save you tens of thousands of dollars (or more, or less, depending upon the size of your loan) in interest payments. For example:
If you have a 30-year fixed-rate mortgage with a loan size of $250,000 and a rate of 5 percent, the monthly principal and interest payment is $1,342. By making a principal and interest payment of $671 every two weeks, you could yield a savings of approximately $112,728 when the mortgage is ultimately paid off. This is a substantial savings that is relatively easy to attain.
Rather than make 12 monthly mortgage payments, homeowners who opt to make half of a monthly mortgage payment every two weeks will make 26 half payments each year. Over the course of a single year, this equates to 13 monthly mortgage payments over a 12-month period. The extra monthly payment goes directly to the principal, eventually saving a lot in interest payments.
Virtually all mortgage lenders offer the option for bi-weekly mortgage payments, while some even offer an option to make weekly mortgage payments. If you are savvy enough with your finances to manage bi-weekly mortgage payments, it truly makes the most sense.
A bi-weekly payment option often has one caveat though: a sign-up fee with your mortgage lender. However, as is the case with most rules and regulations, there is a loophole. Mortgage lenders that do require a sign-up fee often charge hundreds of dollars for this service. While it is still worth it, save yourself the sign-up fee.
To achieve the same results offered in a bi-weekly mortgage payment “plan” without having to pay sign-up fees, you have two options. The first option is to make one additional monthly mortgage payment each year. The second option is to evenly distribute the extra-month’s payment each month throughout the year and add it to your monthly payment. Mortgage statements typically provide a line to include an “extra principal payment.” Either option will produce similar results. The sooner you start, the more you’ll save.