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When searching for a home loan, there are many options to choose from when it comes to how you will pay back the borrowed funds. There are some common repayment options such as the length of repayment and a fixed versus adjustable interest rate, but this article will focus on and compare monthly and biweekly repayment plans.
Biweekly payments are done every two weeks and are normally half of the amount of monthly payments. While that may just seem like spreading out the monthly payment, biweekly payments can actually pay off a loan more quickly and in turn save the borrower money on interest by paying down the principal more quickly. How is this? It’s because biweekly doesn’t always mean twice a month. Biweekly payments are made every two weeks for 52 weeks a year which amounts to 26 half-payments, which is the equivalent of 13 monthly payments.
While a biweekly schedule will reduce the principal and save money on interest with the extra payment put toward the mortgage, there are some myths regarding how this is accomplished. A common misconception is that the first biweekly payment of a month is paid immediately, which would reduce the principal and save more money on interest than a monthly payment. However, this is not the case. For almost all biweekly payments, the first payment is held until it can be combined with the second payment to be submitted as if it were a monthly payment. So while biweekly payments can save money because they put more money toward the principal, it does not accelerate principal reduction as some would have you believe.
However, there are some important factors to review when considering a biweekly repayment schedule. Third-party servicers who make biweekly payments possible as well as the lenders that offer the repayment schedule may charge upfront and even monthly fees for this service. These charges can outweigh the benefit of using a biweekly payment schedule, so be sure to look at all aspects of your repayment schedule to see if you will have any penalties or extra fees for this method.
If you cannot find a biweekly repayment schedule that works in your favor, consider taking a do-it-yourself approach by making an extra annual payment. Since any additional funds sent with a mortgage payment go directly to paying off the principal, this is best done by increasing your monthly payment.
For example, if your monthly mortgage payment was $1,500 dollars per month, in order to find how much you would need to pay each month to make the equivalent of an extra annual payment, you would divide 1500 by 12 to get the additional monthly payment amount of $125 dollars. To explore how much you would save with a biweekly payment, try out our standard versus biweekly payment calculator. Before you pay ahead on your loan, always double-check to make sure that it does not have any prepayment penalties.
Biweekly repayment plans can be a great way to make your payments more manageable and to pay off your mortgage more quickly, but only if you can find the option without additional fees. A DIY approach toward making an extra payment each year can be more preferable because it is not tied to a contract and can be skipped in the event of an emergency.
Are you curious about how paying a little more per month will reduce your loan repayment timeline? There are many strategies to pay off a home loan more quickly. If you’re interested in the repayment plans that we have here at RWM Home Loans or if you’re interested in developing a strategy, contact us and we can explore your options.
Originally posted at: https://rwmloans.com/blog/can-biweekly-payments-pay-off-your-loan-faster