Accelerated Plans Reduce Interest and Help You Pay Off the Loan Faster

Do you want to pay less interest on your home loan? Of course you do, and it's not difficult. There are a few different methods you can use to reduce your total interest and pay off your mortgage at a faster rate.

Bi-Weekly Payment Plans

Your lender probably offers a bi-weekly mortgage payment plan, where you make a half-payment every two weeks instead of a full payment once each month.

By paying bi-weekly you'll make twenty-six half payments, or thirteen full payments each year--one more than you would make by sending the lender traditional monthly payments.

Every dollar of that extra payment goes towards reducing the principal balance of your loan, the balance that future interest calculations are based on. As you reduce the principal, you reduce the total interest paid and the length of time it takes to pay the loan.

Your lender won't accept half payments mailed to them twice each month, but they'll likely set up a plan to deduct the payment from your bank account every other week.

Many lenders charge a one-time fee to set up a bi-weekly payment plan.

Mortgage Examples

Let's look at a mortgage with a principal balance of $150,000, a term of 360 months, and an interest rate of 6%.

Using a Bi-Weekly Option

Most of us won't live in a single house for thirty years, but don't let that stop you from paying bi-weekly, because shorter term savings are significant.

The first figure on each line below shows the loan's principal balance at the end of that year's monthly payments. The second figure shows how much principal remains at that same time for someone making bi-weekly payments.

Bi-Weekly Payment Alternatives

A bi-weekly plan forces us to stay on track with additional mortgage payments, but it's not the solution for everyone who wants to reduce their loan principal more quickly.

One alternative is to divide your yearly payment by twelve and add that figure to each monthly payment, designating it as a payment toward's the principal balance. Your loan payment coupon might have a blank line for that purpose. If not, call your lender's customer service department and ask how to make additional payments towards the principal.

For the loan in the previous scenario, you would divide $899 by twelve to find the extra amount to include with your payment, $75.

Your principal balance would equal the following amounts at the end of each year shown. The numbers in parentheses represent the balance due at the same point in time for someone on a bi-weekly plan.

Third Party Payment Plans

There are intermediary companies that will set up a bi-weekly plan for you. They debit your checking account every other week for the higher, bi-weekly amount, then send the regular monthly payment to your lender. Once each year they'll make your extra payment. Intermediaries charge a fee for the service.

There's no reason to pay a fee for something you can do on your own using another method. What if the intermediary becomes insolvent and doesn't make your payments? Don't let anyone tell you that can't happen--of course it can.

Your lender won't care that it "wasn't your fault" if poor bookkeeping skills result in late payments. It's your responsibility to make payments on time, even if someone else is mailing them for you.

No matter how you do it, making one or more extra payments each year significantly reduces the amount of interest you'll pay on your home loan.

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