If youve got a monthly payment of $2,000 then you would make a $1,000 payment every other week. Since there are more than 2 weeks in a month youre actually paying more toward your loan each month when you average it out over the period of a year. Youve probably heard that if you add 1/12th of your monthly payment to your payment each month youll pay off your mortgage loan in 24-25 years instead of 30bi-weekly payments is the same concept.
What are the benefits of paying bi-weekly and accelerating the payback of your mortgage? They are
Saving Money By shortening your mortgage loan payback from 30 years to anything less than 30 years youre going to save money in interest. Plus youll not be making a monthly payment to your lender so theres the opportunity cost benefit that youll likely realize. For example, if you dont have to pay your lender $2,000 each month any longer then thats $24,000 per year that can be reallocated to pay off expensive credit card debt or put toward a retirement account. Regardless, your money starts to work for YOU instead of for your mortgage lender. Now multiply that $24,000 by 5 years (the number of years youll pay off your loan early) and you can see how quickly the savings add up.
Better Credit Scores Its a fact that having less debt is better for your credit scores. By paying your mortgage bi-weekly youll be exhausting your mortgage loan balance faster than if you simply paid once a month. This means credit scoring systems will eventually begin rewarding you for having less outstanding debt. And better credit scores is an absolute must because lenders, insurance companies, utility providers and tenant screening companies all use credit scores to determine if they want to do business with you and under what terms.
Building Equity Faster - Equity is the value of your home relative to the amount you owe on your home. So, if you live in a home thats worth $100,000 and your mortgage loan is $95,000 then you have $5,000 of equity in your home. Many lenders will let you borrow against the equity in your home. There are two varieties of loans tied to your equity: HELOCS (Home Equity Line of Credit) are a revolving line of credit secured by the equity in your home and a Home Equity Loan is an installment loan (fixed payment for a fixed number of months) also secured by the equity in your home. By accelerating the pay down of your mortgage loan you free up more equity in your house thus giving you more (and better ) borrowing options. Why are home equity related loans a better option?
a) The interest in a home equity type of loan is usually tax deductible. You cant say that about credit card interest or auto loan interest.
b) The interest rates on home equity related loans are almost always much better than credit card interest rates. If youre in credit card debt (the most expensive type of debt) and you have equity in your house then you can pay off the credit cards with the money from a home equity loan and save a bundle in interest (and boost your credit scores at the same time)
Its Nice Not Having a Mortgage Payment Lets face itpaying lenders isnt fun. And while a mortgage loan certainly has benefits (tax deduction) youd rather not be paying a lender every month. Accelerating your mortgage pay back gets you closer and closer to not having a home loan any longerand it gets you there faster. Plus, there are the non-financial benefits of knowing that youre in significantly less debt each month. It kinda makes me smile when I see my statement balance much lower than the prior month.
Credit Cards. At times, it seems like we cant live with them and we cant live without them. It is a classic case of a love-hate relationship. We need the credit cards to help build our all-important credit history and subsidize our expenses when we just dont have the cash. But people deeply resent the high interest rates and the traps lurking in the fine print.
mortgage mistake is not getting credit checks done. One should undergo a credit check even before applying for the mortgage for making sure that his credit rating is supporting his decision of applying for the mortgage; performing a credit check will also give him the opportunity of repairing the existing issues if any before submitting the application.