Bimonthly Mortgage Payments - Convenient But Not Cheap
Fairway Independent Mortgage Corporation
Bimonthly Mortgage Payments : Convenient But Not Cheap
The vast majority of today's mortgages are either 15- or 30-year fixed rate loans with payments made once a month.
It is good to remember, however, that borrowers have mortgage payment options, including the option of making bimonthly payments. The theory is that making more frequent mortgage payments prevents mortgage interest from building up, taking years off a loan.
For example, instead of a homeowner making one $2,000 mortgage payment on the 1st of every month, instead, he would make a payment of $1,000 every 15 days.
In practice, it’s likely that the company receiving a borrower’s mortgage payment isn’t the company that holds the loan. The company that holds the loan could be an insurance company, pension fund, money manager, or a person's retirement plan. The company that receives bimonthly payments often just holds the monies in an account until the end of the month, and forwards the payment along.
Now, a month is technically 4.3 weeks long -- not the exact four weeks which many of us assume. With bi-weekly payments, then, a homeowner ends up making 26 payments per year, or enough for 13 full months.
The extra month is really extra principal, which can shorten a loan term by 6-8 years.
There's a lot of savings in shortening a loan term, but there are costs to consider, too. For one, banks often charge fees for the right to use a bi-weekly payment program, and second, once you start a bi-weekly payment program, you're committed to paying your mortgage every 14 days until it's paid in full.
In other words, although making twice-a-month payments remains a viable option, it may make better financial sense to set extra money aside monthly just to make the "13th month" payment on your own.