If you are looking to save money on your mortgage or other large loan, there is one simple change you can make that could save you tens of thousands of in interest charges, and allow you to pay your loan off several years early. The secret is to cut your monthly loan payment in half. Then send this amount in every two weeks rather than once a month. Since a year has 52 weeks, you will make 26 payments. This is the equivalent of making 13 monthly payments instead of 12. If the biweekly loan payment arrangement is set up correctly, the extra mortgage payment all goes toward paying down the loan's principal. Reducing the loan balance faster substantially reduces the total amount of interest that will paid. Let's take a look at an example to see how this cost savings is achieved.
The gains from making biweekly payments are easier to notice with longer term loans & loans for higher Dollar amounts. Let's say a homeowner has a $100,000 30-year fixed rate mortgage with a 6.5% interest rate. If it takes the homeowner the entire 30 years to pay off the loan, the homeowner will end up making 360 monthly payments of $632. This amounts to $127,544 in interest and $100,000 in principal. The grand total paid would be $227,544. If the homeowner set up biweekly loan payments instead, they would pay $316 every two weeks for 24 years. The total amount of interest paid would be only $97,214 in addition to the $100,000 principal. By making this one simple change, the homeowner will save $30,329 in interest and pay their loan off six years early!
To find out how much you could potentially save on either a new or existing mortgage, you can plug in your numbers for principal loan balance, annual interest rate and amortization period (length of loan). The above calculator will give you a comparison between the monthly and biweekly payment schedule.
As you can see from the above example, biweekly loan payments result in several important benefits:
You cannot simply send in half of your payment every two weeks. You will need to make arrangements with your lender. Not all lenders will allow biweekly loan payments, however many do. If your lender does allow for biweekly loan payments, they will be automatic withdrawals from your bank account. There are two major things you need to check for. First, you need to make certain there is not a prepayment penalty for paying off your mortgage early. Second, make sure that your lender immediately credits the biweekly payment. If the payment is not credited until the second half of the payment is received, you will not see any benefit from a biweekly payment plan. Some lenders hold partial payments until receiving the remainder of the payment. If this is the way your lender operates, then there is no advantage to setting up automatic biweekly loan payments. If they do credit the payments immediately, then you can go ahead and set up a biweekly payment arrangement with your lender. You may be charged a fee to do so.
If you are unable to setup a biweekly loan payment schedule with your lender, there are still several ways to achieve a similar result.
One way to do this is set up an automatic savings plan, where money is automatically deposited into a savings account. Take one monthly payment and divide it by 12. Then have this amount deposited into your savings account each month. At the end of the year you will have the equivalent of one extra monthly payment, and you can send this to the bank to be applied against the principal. Or you can send an extra 1/12 in with your regular monthly payments, which will also help you pay off your loan earlier and save on the total amount of interest you pay.
There are also third party companies that will set up biweekly loan payments for you. However, these companies will charge a set up fee of several hundred dollars. It is usually best to either set up your payment schedule directly with your lender or make arrangements to pay the extra mortgage payment yourself and avoid the setup fee that third party services charge.
Whether you make biweekly loan payments, send an extra payment at the end of the year or add extra money to your payment each month, all of these methods will save you a substantial amount of money by reducing the total interest paid on the loan. Whether you have an existing mortgage or are considering a new one, you should strongly consider setting up a biweekly loan payment schedule. You will save thousands in interest charges and pay your loan off several years early.