The traditional mortgage agreement entails a singular monthly payment on the borrower’s part. The amount paid each month is divided, in some way, between the principal of the loan and the interest attached to the loan. Some borrowers, however, prefer to take a more aggressive approach toward their mortgage loan payments. This happens even more often in cases of second mortgages.
They take on bi-weekly payments rather than the traditional monthly payment format so that they may tackle more of the principal on the loan and reduce how much they are spending toward their mortgage interest rate.
While this sounds like a great idea at face value, there can be drawbacks to making bi-weekly payments like this. Continue reading to learn more about what it takes to make this kind of payment schedule work for you.
What are the Benefits of Paying Bi-Weekly Instead of Monthly?
Quite simply, people adopt this payment schedule for two purposes:
- To direct more funds toward the principal of the loan.
- To reduce how much is spent on interest over the term of the loan.
When it’s put that way, the appeal of making bi-weekly payments is obvious. By making 26 bi-weekly payments in the 52-week calendar year, this adds up to a 13th mortgage loan payment by the end of the year. This additional payment can go directly toward the principal of the loan, if your chosen lender allows for it. And when this happens, you can see a drastic difference in your interest payments within just a few years.
However, it is important to keep your lender’s terms and conditions in mind. Not all lenders are so eager to accept this aggressive form of loan repayment.
When Does This Payment Schedule Fail to Work?
Making bi-weekly payments to a lending institution that uses a third-party processing agent for their payments can be expensive and even downright pointless. These third parties are ineffective at helping individuals get ahead on their mortgages for a couple of reasons:
- They may hold onto a payment until the second bi-weekly payment comes in, and then make the payment on your behalf. This does nothing to help a person get ahead.
- Oftentimes, these third-party processing companies will charge incredibly steep fees for making additional payments toward your mortgage. This is on the borrower to pay and is typically not worth it.
It is beneficial for you to look over the terms of your mortgage agreement before you sign it, if making bi-weekly payments is important to you. If you end up with a lending institution that makes use of one of these third-party services, there’s a good chance that this payment approach won’t work out.
Make sure to ask your lender these questions, so that you can determine whether it’s a wise move to make bi-weekly payments:
- “Do you process payments or is a third party responsible?”
- “What fees, if any, do you/the third-party charge for additional mortgage loan payments?”
- “Will my second payment each month go only toward the principal, or toward both the interest and the principal of my loan?”
- “What other penalties may I face by making these extra payments?”
Bi-weekly payments, while ambitious and aggressive, can be a tremendously useful approach to tackling the principal on a mortgage loan. This is only true, however, when your lender processes their payments themselves. Third-party processing companies are expensive and inefficient to work with – they will not help you advance on your loan.
