1 Way To Shave 4 Years Off Your Mortgage


Source: American Advisors Group.

Do you want to pay your mortgage down quicker, but don't think you can afford much more than you're already paying? A bi-weekly payment plan may be the way to go for you. By simply paying half of your mortgage payment every two weeks instead of paying the entire payment monthly, you could potentially shave years off of your repayment time and build equity in your home faster.

Many banks charge for this, but several institutions with large mortgage businesses like Wells Fargo (NYSE: WFC  ) will let you set up a biweekly payment plan for free. While the saving of a few hundred dollars alone isn't a reason to choose Wells, it's one more reason that Wells Fargo has blossomed into the nation's leading mortgage lender.

Why it works
At first, biweekly and monthly payment plans may sound like the exact same amount of money coming out of your pockets, especially to new homeowners. However, there is one big difference.

We all know there are 52 weeks in a year, right? So, if you pay every two weeks, you're making a total of 26 payments each equal to half of your monthly payment. 26 divided by two is 13, so by using a biweekly payment plan you are actually making 13 full monthly payments each year, one more than you normally would.

Since biweekly paychecks are the most common form of payroll schedule in the U.S., it almost makes more sense to have money come out on each payday instead of holding it in your account until the end of the month.

The effect is pretty nice
So, how much of an effect could one extra payment per year really have on paying off your home? More of an effect than you may think!

To illustrate this, let's consider a $250,000 30-year mortgage at an interest rate of 4.5%. On a standard monthly payment plan, the loan would obviously take 30 years to pay in full, and the standard monthly payment amount would be about $1,266. However, on a biweekly plan it would only take 25 years and 8 months to pay the loan in full. In other words, those extra payments cause your house to be paid off more than four years faster!

And the early payoff isn't even the best part. The real benefit is the amount you save in interest over the life of the loan. Take a look at the total interest you pay with each payment plan.

You save more than $33,000 just by switching your payments to -- what I think -- is actually a more convenient payment schedule.

The smart banks offer this for free
For example, if you're mortgage is held by Wells Fargo, which is fairly likely since it has the largest mortgage business of any bank, the process is very easy. The company's Preferred Payment Plan allows mortgage holders to have biweekly (or weekly) payments automatically debited from their checking or savings account. Go online and call your lender to find out about their options.

This is an extremely smart move on the part of Wells Fargo, because in order to take advantage of the free payment plan, the mortgagee must have a checking or savings account with the bank. Wells Fargo services a lot of mortgages it didn't originate, so those customers have an added reason to open an account at what is already one of the most convenient banks in the world.

Will the others follow suit?
One thing that I can tell you is the biweekly payment plan should be free, so check with your lender to see if they offer it. Wells Fargo isn't the only bank that offers it, just the largest.

As soon as I bought my house, I started to receive third-party offers to set up a biweekly plan for my mortgage for a fee (about $250-300 seems to be the norm). By no means should you pay this. If your lender won't set it up for free, you can simply mail in a check for half of your payment amount every other week, with a letter instructing the lender to apply extra funds to the principal.

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  • Report this Comment On May 12, 2014, at 2:15 PM, HueLien wrote:

    Thanks for covering the topic, I want to point out to you that the do-it-yourself model is not as easy as it appears. Almost every lender applies extra payments differently. Some will only apply extra payments to principal if they are sent to an entirely different place than your monthly payment, others require you to write "principal payment" on your check, while others refuse to accept it if such a notation is made. Many lenders have specific and varied formulas to apply a payment to principal and still others flatly refuse to apply it to principal. Even if you had the years of experience required to figure out which type of lender you are dealing with, you would have to continually audit your account to make sure that the accelerated payments are being applied as intended. As you can imagine, this can lead to a lot of frustration and time "on-hold" with the lender.

    Paying a service fee for automating your biweekly payments will ensure your payments are made on-time and its just plain easy because you get into a routine of paying a 1/2 payment every two weeks.

    If you could save $20,000 on your mortgage and pay someone to manage the details for a few hundred dollars versus not doing it at all (which is generally what happens), what's the better choice?

    Hue Lien Duxbury, director of Marketing for US Equity Advantage, a biweekly and early loan payoff service provider.

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