A mortgage is not only your ticket to a home you can enjoy and grow in, but it's also one of the most valuable investments most Americans make. And a surefire way to make your home loan work even harder for you is to pay it off early.
Not sure how you can accomplish this? The simplest method is by setting up bi-weekly payments. How can this easy change save years on a loan? Here's a short guide.
What Is a Bi-Weekly Payment?
Nearly all mortgages come with monthly payment terms. This is the standard repayment method, and it's the one that is used to calculate how much interest you'll pay over the full term of the loan. You'll make 12 payments per year.
However, bi-weekly payments are made every two weeks instead. You divide the monthly amount in half and pay each portion every other week. Because there are 52 weeks in a year, you make 26 half-payments instead of 12 full ones. That means you make two extra payments each year without even doing anything out of the ordinary.
What Can Bi-Weekly Payments Do?
Those two extra payments don't sound like much, but they can shave off as much as eight years from a normal 30-year loan. Not only will you get done paying faster, but you will save thousands of dollars in interest because your balance (on which interest is calculated) is reduced much faster. If you get paid through your job every week or every other week, it makes for a simple way to budget your money since you already get two extra paychecks per year as well.
What Should You Do First?
If you think that bi-weekly payments would work for you, start by talking with your mortgage broker to see if the loan allows these types of advance payments. You may need to designate the extra payment (or a portion of it) as a "principal only" payment, which is applied to your balance and not your interest. If the loan wording only allows extra payments at certain intervals, open a bank account on your own and place the extra payments into it. When an appropriate opportunity to pay down principal or refinance the loan for a lower amount comes up, you'll be ready.
Bi-weekly payments are one of the best ways to automate savings through your home loan. While it may take some adjustment, you'll quickly see the benefits of this payment method as you build equity in your home and plan for a more secure financial future.
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