A mortgage is often the single largest debt you will take on during your lifetime. When shopping for a mortgage and ultimately deciding how much to spend, many people often only consider two things—how much the overall mortgage will be and how much their monthly payments will be. While those two factors are important, another important factor is how much you will pay in interest, which, when combined with the mortgage amount, will give you the amount you will pay overall to buy a home.
Consider the following example:
Steve and Jen buy a home for $350,000. They put down $70,000, and take out a thirty year mortgage at a 4% fixed interest rate for $280,000. Their monthly payments are $1,336.76, which they feel they can comfortably handle. Every month they dutifully make their payments, and at the end of 30 years, they own their home outright. While they may be thinking they paid back $280,000, they actually paid back $481,234.62, paying $201,234.62 in interest.
If they instead take out a 15 year mortgage with the same terms, the overall financial picture gets better. They now pay a monthly payment of $2,071.13, and at the end of 30 years, they have repaid $372,802.71 including $92,802.71 in interest.
As these two scenarios demonstrate, the amount repaid in interest is significant and should not be ignored, as people often do. Once most people realize how much they are paying in interest, even factoring in the current low interest rates, the natural inclination is to find a way to lower the amount of interest paid. There is a very simple way to do this—make your mortgage payments biweekly instead of monthly.
Benefits of Bi-weekly Payments
- Painlessly make one extra mortgage payment a year. You will be making 26 payments throughout the year if you pay biweekly, which means you will be making 13 monthly payments. Although it doesn’t sound like much, that one extra payment yearly can make a significant dent in your mortgage.
- Pay less interest over the course of the loan’s life. If we go back to the example of Steve and Jen with their 30 year mortgage, if they pay biweekly and do nothing else to accelerate paying down their debt, they will pay $169,820.69 in interest, a savings of $31,413.93 in interest!
- Pay off the loan years earlier. In addition to the significant amount of interest Steve and Jen will save by making biweekly payments, they will shave 49 months off their repayment time. Instead of repaying for 30 years, they will only be repaying for 25 years and 11 months. For a 15 year mortgage, they would get it paid off 18 months sooner, reducing the life of their loan to 13.5 years.
Many banks offer biweekly payments as a service they can set up for you for a fee, but there is usually no need to formalize the arrangement unless you lack the discipline to pay biweekly yourself or your bank specifically states in the mortgage agreement that you are not allowed to pay additional payments. If discipline and the mortgage contract are not problems, simply pay biweekly on your own and watch the years disappear from your mortgage.
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