Many people who have running mortgages may have received letters that claim they can clear out about six years (or more) from their home loans.
The common strategy offered to achieve this goal is by opting to pay mortgage every two weeks instead of monthly payments. It is believed that paying more frequently can lower the cumulative interest for mortgages that last between fifteen to thirty years. This also means the fewer number of years will reduce the loan. You can calculate here.
We have analysed this logic below to determine if it actually works
Will you get a better credit score?
Many people hold the opinion that biweekly payments can improve their credit reports but the experts say this is not true. If you choose to use the biweekly payment option offered by the mortgage company, you will have an automatic withdrawal system set up for your account to enable you to make prompt payments. This means your credit score will be improved due to your early payments and no defaults. However, this benefit also applies to the monthly mortgage payments.
Can you successfully lower the interest?
This is another aspect many people misunderstand. In many cases, the company you pay the mortgage to is not the same company managing the loan. If you choose to pay biweekly, the company receiving this money maintains their standard mode of payment to the company you took the loan from so there is no real impact. The early payments are mostly saved in your account until the actual time for payment which is at month end.
Now let's talk about the interest. Each year has fifty-two weeks, considering that every month has four weeks, that means there are only actual forty-eight weeks. The biweekly payments you make will not fall under two payment, but it will be regarded as twenty-six half payments which equal thirteen monthly payments every year. You can get a clearer picture if you use the biweekly mortgage calculator for this analysis. The biweekly payments add up to thirteen monthly payments every year which is in line with the twelve payments you make a year. The payment for an extra month means you have paid an extra principal which reduces the duration of the loan by six or eight years.
Avoid signing a binding contract
The offers to convince you to accept the biweekly payment option can cause two issues. First, you will be charged a fee, and the plan means your bank will make more money. The profits come from charges you will pay for the two-week loan which conforms to the Bankrate. Then, many people are already committed to different contractual agreements for other reasons. You can make your budget more flexible by staying away from the biweekly payment arrangements. However, if you receive a total of three paychecks a month, tax refunds, or you suddenly get some disposable income, you can make extra payments off your mortgage.
Torsi is a professional blogger.