by Mike on September 13, 2009
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If you own your own home and pay a mortgage, you probably receive all sorts of offers from banks who want you to take out a home equity loan, refinance your current loan, or convert your mortgage into a biweekly mortgage.
The paperwork explaining the biweekly mortgage says that it can cut between five and seven years off your mortgage and save you thousands of dollars in interest. Sounds pretty good, huh?
It works quite simply. Instead of paying your mortgage monthly, you pay half your monthly bill biweekly. By paying the bill every other week, you end up making an extra payment each year.
For example, let’s say your monthly mortgage payment is $1,400. If you make 12 monthly payments, you will have paid $16,800 at the end of the year.
If you pay biweekly, you’ll end up making 26 payments each year. So if you pay $700 every other week, you will have paid $18,200 at the end of the year. The end result is that you made one extra payment, which reduces your loan balance and interest charges.
This is how you can cut years off of your mortgage. That extra $1,400 a year eats away at your balance and helps you pay it all off early.
Paying off your mortgage early is a sound financial move if you can do it. But is it necessary to sign up for one of these biweekly mortgages (sometime called Accelerated Payment Plans)?
Nope. Not at all. You see, there’s a catch. in order to sign up for the biweekly mortgage that your bank is offering, you have to pay a fee. It’s usually somewhere between $300-$500. Some banks will also charge you a monthly processing fee.
But I can show you a better way to pay off your mortgage just as fast without having to pay any fee at all.
Just take the amount of your monthly mortgage payment and divide by twelve. Using the example above, $1,400 divided by 12 equals $116.67. Now simply add this amount to your payment each month and make sure to make a note that you want it applied to principal.
By making 12 payments of $1,516.67, you will have paid off $18,200.04 at the end of the year. Just like that, you’ve gained all of the advantages of the biweekly mortgage without having to pay any fees or service charges.