For Mark Roberts’ Use: Home ownership is a central part of the American Dream, and many soon-to-be retirees hope to have their homes paid off before they stop working. One of the drawbacks to owning a home, however, is the length of time it takes to finally pay for one. Most people opt for 30 year mortgages these days, and due to interest on the loan the final amount paid is significantly greater than the original purchase price of the house.
Most people opt to pay their mortgages on a monthly basis. What some don’t know is that switching to a biweekly payment schedule can dramatically impact both the length of the mortgage as well as the final amount paid for the home.
With this type of payment arrangement, homeowners pay half of the regular monthly payment every two weeks. For example, if the monthly payment is set at 1,000 dollars per month, the new payments would be 500 dollars every two weeks.
So what’s the difference? There are 12 months in the year, so normally the homeowner would be making 12 payments. Switching to a biweekly payment system, however, won’t mean 24 half payments; it will actually mean 26 payments! This is like making 13 regular payments instead of 12.
Since many people are paid on a biweekly basis anyway, they’re unlikely to notice this extra payment. But the extra payment each year will be taken directly off of the principal of the loan, and will shorten the length of time it takes to pay off the mortgage. The homeowner will pay much less interest over the life of the loan, and the length of the mortgage can often be shortened by five years or more!
Switching to a biweekly mortgage payment schedule is one way to prepare for retirement. Many mortgage companies will allow borrowers to make this change for free, but others will try to charge a fee to refinance the loan. It makes sense to shop around, because it is often possible to make this change without being charged additional fees.