Thing to Consider Before Making Biweekly Mortgage Payments
Many factors play into how to repay your share of $135 billion mortgage debt
SAN MATEO, Calif., Feb. 14, 2007 - With homeowners owing a collective $134.8 billion in home mortgages, this sector of the financial industry draws a great deal of attention, with some of the interest focusing on specialty mortgage payment plans such as "biweekly" mortgages. Andrew Housser, co-founder and co-CEO of Bills.com, understands that paying a home loan off early has appeal -- but he advises borrowers to first understand the process. "Traditionally, mortgage payments are made monthly, with 12 payments per year," Housser explained. "A biweekly payment plan has the borrower pay half of a regular mortgage payment every two weeks -- equating to 26 half-payments over a year. Without adding much to the monthly budget, a homeowner making a biweekly mortgage payment is effectively making one extra mortgage payment per year." Paying the mortgage off sooner has some key benefits. Obviously, making extra payments will pay down the balance faster, says Housser, which in turn will dramatically lower the total interest paid over the life of the mortgage. Homeowners also receive the benefit of paying half the mortgage payment in the middle of the month, which could lower total interest paid even further. Housser advises homeowners to consider the following factors before launching any accelerated payment process:
- Check for prepayment penalties. If the mortgage has a prepayment penalty, borrowers face hefty charges if they pay it off early. Review the Truth in Lending disclosure to find out.
- Budget. Is paying more each month affordable? First, have an emergency fund and solid cash flow in place. Rest content with paying the mortgage as scheduled until these safeguards are in place.
- The earlier, the better. Making extra payments starting earlier in the life of the mortgage will make a bigger difference in the amount of interest paid over the years.
- Consult a tax advisor. Homeowners who itemize deductions reap tax benefits from paying mortgage interest. Paying less interest means fewer deductions. Generally, homeowners find that losing the deduction is worth it to eliminate the bill, but speak with a tax advisor and consider it carefully.
- What else could the money do? Consider investing the additional money in a savings or retirement vehicle rather than putting it toward the mortgage. This is an especially good consideration if savings would earn a higher rate than the interest rate on the mortgage.
Those who choose an accelerated payment schedule have several options to choose from.
- Some mortgage companies offer pre-packaged biweekly payment plans. These plans usually involve a set-up fee as well as a monthly charge -- for a service homeowners may be able to do on their own (see below).
- Simply pay half the mortgage biweekly. Caution: Some mortgage companies will return a check that is less than the amount of the bill or received at an odd time. Others may charge a prepayment penalty. Check the lender's policies carefully.
- Divide the monthly mortgage payment by 12. Add the amount to the monthly payment (write it on the "Additional Principal" line of the statement). Doing this every month will result in an extra month's payment each year.
"Paying off a mortgage can be a great relief," Housser said. "On the other hand, with mortgage debt, you're paying to own your own home, with beneficial tax deductions. Consider all your options before choosing the right path for your finances." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com and its partner company, Freedom Financial Network, have served more than 10,000 customers nationwide while managing more than $350 million in consumer debt. The company's co-founders and CEOs, Andrew Housser and Brad Stroh, were named Northern California finalists in Ernst & Young's 2006 Entrepreneur of the Year Awards.