257 | How to Pay Off Your Mortgage Early: Biweekly Payments Explained

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Hey, Budget Besties!

🏡💸 Ever get those offers from your bank asking if you want to opt into a biweekly payment program? To some, your initial reaction might be, "Sounds like math...and I’m not sure if this is a good idea." Don’t worry, we’ve done the research for you, and we're here to break it all down!

The Problem:

Most homeowners don’t realize that they pay the most interest in the first seven years of their mortgage. If you check your statements, you’ll see that a tiny portion of your payment goes towards the principal, while the majority goes towards interest. Banks know this, and that’s why they want to get their money upfront.

The Biweekly Payment Plan:

Banks offer biweekly plans, but what's the deal with those? Here's how it works:

1. Monthly Payment: If your mortgage is $2000/month, you pay $24,000/year.

2. Biweekly Payment: You pay $1000 every two weeks, resulting in 26 payments per year (52 weeks/2), totaling $26,000/year.

That’s an extra $2000 annually, effectively making one additional monthly payment each year. This reduces your principal faster, saving you thousands in interest over the life of the loan.

Our Recommendation:

Instead of following the bank's plan, which might complicate your budget with biweekly payments, we suggest:

1. Stick to Monthly Payments: Calculate your extra payment for the year and divide it by 12.

2. Add Extra to Your Monthly Payment: If you want to add $2000 extra annually, add about $167 to your monthly payment.

3. Direct Extra to Principal: Ensure you specify that the extra amount goes directly towards the principal, not next month’s bill.

When to Consider This:

1. Assess Your Priorities: Your money can only do so much. Decide if paying off your mortgage faster is a priority over other financial goals like savings, debt repayment, or investments.

2. Check Your Budget: Ensure you have enough extra income each month to cover the additional payment without straining your finances.

Real-Life Application:

When Vanessa paid off her mortgage, she prioritized security over potential investment gains. Knowing her house was paid off was worth more than the interest she could have earned elsewhere.

Final Thoughts:

If you have the budget for it, making extra mortgage payments can save you tens of thousands of dollars and cut years off your loan. Just make sure to automate it and communicate with your bank that these payments should go toward the principal.

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