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The Benefits Behind Bi-Weekly Mortgage Payments

By manybanking.com Staff
The turbulent economic times have many people wisely looking for ways to quickly reduce debt.

Category Product: 
Mortgages
Category Finance: 
Personal Finance
Keywords: 
Mortgage, Mortgage Payments, Bi-Weekly Mortgage Payments, Home Loan, Debt, Insurance, Retirement
Introduction: 

By manybanking.com Staff
The turbulent economic times have many people wisely looking for ways to quickly reduce debt.

As a result, more and more homeowners are considering the benefits of making bi-weekly mortgage payments instead of monthly. With this tactic, homeowners can pay off their mortgage debt much faster and save thousands of dollars in interest.

Here’s how it works. You divide your normal monthly payment in half and pay that amount every two weeks. When you make payments on a bi-weekly basis, you actually make the equivalent of 13 normal payments a year instead of 12, because most months are slightly longer than four weeks. One additional mortgage payment a year goes a long way.

For example: A 30-year mortgage of $200,000 with a 5.5% interest rate would cost about $1,135 a month. By paying half of the monthly payment ($567.50) every two weeks, it would only take 24.9 years to pay off the mortgage. Additionally, there would be $41,503 in interest savings over the life of the loan. Use manybanking.com’s Bi-weekly Mortgage Calculator to calculate the savings on your mortgage.

While this seems like a very straightforward way to save money, it may not always be the best option. Mortgage debt is some of the least expensive debt you can get, particularly now with interest rates at historic lows. In addition, mortgage debt is often tax-deductible. If you have a 5.5% interest rate on your mortgage and are in the 28% tax bracket, your tax savings can effectively lower your interest rate to less than 4%. The extra money you pay towards your mortgage could go further elsewhere.

If you have any other debt that you are paying at a higher interest rate than your mortgage, you should pay that off before considering making bi-weekly mortgage payments. Paying off a credit card with a 14% interest rate, for example, is like earning 14% return on your money. That’s probably the best return you will find anywhere these days.

Additionally, paying off a mortgage should take lesser priority to funding your retirement. Even with the current volatility of the stock market, fully funding your retirement fund should be a top priority. Over 20 to 30 years, the volatility of the market typically evens out, and the market usually averages returns of around 8%. If you’re not fully funding a workplace retirement fund, you might be missing out on the benefits of employer matching funds as well.

Having enough insurance should also take priority to making extra mortgage payments. Proper health, disability and life insurance coverage is crucial to avoiding financial disaster in the event of an accident or illness. Likewise, you need to amass an adequate emergency cash fund to cover unexpected expenses and maintain your lifestyle if you are ever unable to work for several months. The prospect of paying off your mortgage early is very attractive, but you should only do so if you have all the other pieces of your financial portfolio in order first.

If you are nearing retirement, however, paying off your mortgage early may be a wise way to reduce your living expenses when living on a fixed income. If you do decide to make bi-weekly payments, don’t opt for a bi-weekly payment plan from your lender. These plans often cost additional fees and compel you to make bi-weekly payments.  Instead, set your bank account to make automatic payments or just make one lump sum additional payment each year.

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As a result, more and more homeowners are considering the benefits of making bi-weekly mortgage payments instead of monthly. With this tactic, homeowners can pay off their mortgage debt much faster and save thousands of dollars in interest.

Here’s how it works. You divide your normal monthly payment in half and pay that amount every two weeks. When you make payments on a bi-weekly basis, you actually make the equivalent of 13 normal payments a year instead of 12, because most months are slightly longer than four weeks. One additional mortgage payment a year goes a long way.

For example: A 30-year mortgage of $200,000 with a 5.5% interest rate would cost about $1,135 a month. By paying half of the monthly payment ($567.50) every two weeks, it would only take 24.9 years to pay off the mortgage. Additionally, there would be $41,503 in interest savings over the life of the loan. Use manybanking.com’s Bi-weekly Mortgage Calculator to calculate the savings on your mortgage.

While this seems like a very straightforward way to save money, it may not always be the best option. Mortgage debt is some of the least expensive debt you can get, particularly now with interest rates at historic lows. In addition, mortgage debt is often tax-deductible. If you have a 5.5% interest rate on your mortgage and are in the 28% tax bracket, your tax savings can effectively lower your interest rate to less than 4%. The extra money you pay towards your mortgage could go further elsewhere.

If you have any other debt that you are paying at a higher interest rate than your mortgage, you should pay that off before considering making bi-weekly mortgage payments. Paying off a credit card with a 14% interest rate, for example, is like earning 14% return on your money. That’s probably the best return you will find anywhere these days.

Additionally, paying off a mortgage should take lesser priority to funding your retirement. Even with the current volatility of the stock market, fully funding your retirement fund should be a top priority. Over 20 to 30 years, the volatility of the market typically evens out, and the market usually averages returns of around 8%. If you’re not fully funding a workplace retirement fund, you might be missing out on the benefits of employer matching funds as well.

Having enough insurance should also take priority to making extra mortgage payments. Proper health, disability and life insurance coverage is crucial to avoiding financial disaster in the event of an accident or illness. Likewise, you need to amass an adequate emergency cash fund to cover unexpected expenses and maintain your lifestyle if you are ever unable to work for several months. The prospect of paying off your mortgage early is very attractive, but you should only do so if you have all the other pieces of your financial portfolio in order first.

If you are nearing retirement, however, paying off your mortgage early may be a wise way to reduce your living expenses when living on a fixed income. If you do decide to make bi-weekly payments, don’t opt for a bi-weekly payment plan from your lender. These plans often cost additional fees and compel you to make bi-weekly payments.  Instead, set your bank account to make automatic payments or just make one lump sum additional payment each year.

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