When borrowing money to purchase or refinance a home, most make regular monthly payments for the life of a loan. Each payment made covers a portion of the principal or amount of money borrowed and interest (what the lender charges you for the money borrowed). Many borrowers do not realize that they can save money on interest and pay off their loan faster by simply making, bi-weekly payments rather than monthly payments.
What you should know about bi-weekly mortgage payments
Depending on your mortgage type, payments are usually consistent in amount and made on a monthly basis. During the first few years of paying your mortgage, the majority of payments will be used to pay off the interest on your loan. Over time, your payments will start applying more and more to the principal (the amount you actually borrowed for your home). Since your interest owed is calculated based on the principal balance, the faster your payments can be applied to the principal amount, the more money you will save on your loan, and the faster your mortgage will be paid off.
Bi-weekly mortgage payments enable you to use the yearly calendar to your benefit. By making a payment every two weeks you will have made 26 payments rather than 12 if you had paid monthly. Your total monthly mortgage expense will be the same for biweekly as monthly payment schedules, and by paying every two weeks you are paying about one extra payment per year. These extra payments can shave off years to the life of your loan, saving you thousands on interest payments. For example, say you have a 30 year fixed rate mortgage for $100,000 at 6.5%. When paying bi-weekly, you will pay off your mortgage in about 24 years and save approximately $28,000 in interest over the lifetime of your loan. Even though you’ll be making an extra payment each year, you won’t likely feel a significant financial impact because the payments will be spread throughout the whole year. Another benefit of paying bi-weekly is that you can align your payments with a bi-weekly pay period, making budgeting per pay period easy.
If your budget allows the extra month's payment per year, a bi-weekly mortgage could be your best option. Whether you're looking to purchase a new home or refinance, Skowhegan Savings has you covered with support from local mortgage lenders who keep your loan serviced by our team based in Maine. Reach out to one of our community bankers to learn more about our bi-weekly mortgage options and click here to see our current rates.