Getting a great rate on a mortgage takes some research and negotiation, and one aspect of saving money that some homeowners have never considered is the idea of a bimonthly (or biweekly) mortgage payment. This type of payment schedule requires a payment be made to the bank or lender every two weeks instead of once a month, and there are some benefits to utilizing this type of plan.
The reason a homeowner might want to switch to such a payment schedule has to do with the amount paid on the mortgage each year through bimonthly payments, which differs from the amount that would be paid with a monthly schedule. By utilizing a bimonthly payment schedule, a homeowner might be able to shave anywhere from five to eight years off their mortgage payment timeframe.
Interestingly, many homeowners are under the mistaken impression that paying a mortgage on a bimonthly basis would reduce the amount of compound interest charged on the loan and this reduction would lead to being able to pay off the mortgage sooner. This is actually incorrect as the real reason a mortgage would be paid off sooner through bimonthly payments is due to the extra payment on the mortgage each year.
A monthly payment schedule results in 12 payments a year while a bimonthly payment schedule equals 13 payments a year. Simple math suggests that adding an extra payment each year will result in a mortgage that is paid off more quickly.
There are some fees and conditions associated with obtaining a bimonthly mortgage payment, so it’s important to consider such costs, but the opportunity for saving money by making an extra payment each year is immense. One of the most significant ways that a family can ensure financial stability is through the completion of a mortgage loan and the full ownership of the family home.
Although it might not seem as though a bi-monthly mortgage payment would benefit a homeowner who wasn’t planning on staying in a home for more than five or 10 years, there is actually an advantage of such payment strategies for such individuals. The extra payment made each year on that mortgage would equal a higher level of equity gained from the home during residence, and that money would come back to the homeowner when and if the property was sold.
Of course, some homeowners would be apt to want to use that money sooner rather than later and wouldn’t care whether money was saved through a bimonthly payment strategy for equity down the road. Each homeowner is different and would need to consider carefully whether making that extra payment each year would offer a true benefit.
It’s also worth figuring out whether investing the extra payment each year in something like a Roth IRA would make better financial sense, or whether paying off that mortgage more quickly would be the way to go. Speaking with a financial planner would be the best way to determine which route would offer the biggest opportunity for saving money.