Should I Pay My Mortgage Bi-Weekly?

One of the more lesser known factoids about your mortgage loan is that you have the ability to accelerate its payback.  Just because your terms are $X per month for 30 years (or 15 years) you are absolutely allowed to pay more each month, pay more often, or pay it off early at any time.  In fact, there are significant benefits to accelerating the payback of your mortgage loan by paying bi-weekly instead of just monthly.  Here’s how it works..

If you’ve got a monthly payment of $2,000 then you would make a $1,000 payment every other week.  Since there are more than 2 weeks in a month you’re actually paying more toward your loan each month when you average it out over the period of a year.  You’ve probably heard that if you add 1/12th of your monthly payment to your payment each month you’ll pay off your mortgage loan in 24-25 years instead of 30…bi-weekly payments is the same concept.

What are the benefits of paying bi-weekly and accelerating the payback of your mortgage?  They are…

Saving Money – By shortening your mortgage loan payback from 30 years to anything less than 30 years you’re going to save money in interest.  Plus you’ll not be making a monthly payment to your lender so there’s the “opportunity” cost benefit that you’ll likely realize.  For example, if you don’t have to pay your lender $2,000 each month any longer then that’s $24,000 per year that can be reallocated to pay off expensive credit card debt or put toward a retirement account.  Regardless, your money starts to work for YOU instead of for your mortgage lender.  Now multiply that $24,000 by 5 years (the number of years you’ll pay off your loan early) and you can see how quickly the savings add up.

Better Credit Scores – It’s a fact that having less debt is better for your credit scores.  By paying your mortgage bi-weekly you’ll be exhausting your mortgage loan balance faster than if you simply paid once a month.  This means credit scoring systems will eventually begin rewarding you for having less outstanding debt.  And better credit scores is an absolute must because lenders, insurance companies, utility providers and tenant screening companies all use credit scores to determine if they want to do business with you and under what terms.

Building Equity Faster –  Equity is the value of your home relative to the amount you owe on your home.  So, if you live in a home that’s worth $100,000 and your mortgage loan is $95,000 then you have $5,000 of equity in your home.  Many lenders will let you borrow against the equity in your home.  There are two varieties of loans tied to your equity:  HELOCS (Home Equity Line of Credit) are a revolving line of credit secured by the equity in your home and a Home Equity Loan is an installment loan (fixed payment for a fixed number of months) also secured by the equity in your home.  By accelerating the pay down of your mortgage loan you free up more equity in your house thus giving you more (and better ) borrowing options.  Why are home equity related loans a better option?

a)  The interest in a home equity type of loan is usually tax deductible.  You can’t say that about credit card interest or auto loan interest.

b)  The interest rates on home equity related loans are almost always much better than credit card interest rates.  If you’re in credit card debt (the most expensive type of debt) and you have equity in your house then you can pay off the credit cards with the money from a home equity loan and save a bundle in interest (and boost your credit scores at the same time)

It’s Nice Not Having a Mortgage Payment – Let’s face it…paying lenders isn’t fun.  And while a mortgage loan certainly has benefits (tax deduction) you’d rather not be paying a lender every month.  Accelerating your mortgage pay back gets you closer and closer to not having a home loan any longer…and it gets you there faster.  Plus, there are the non-financial benefits of knowing that you’re in significantly less debt each month.  It kinda makes me smile when I see my statement balance much lower than the prior month.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.  Follow him on Twitter here.

Categorised in: Credit Report, Credit Score, Debt, Improving Credit, Money & Identity

This post was written by John Ulzheimer