Financial fluctuations are common and ongoing but that monthly mortgage bill is steady. If you have managed to secure some extra cash or if your income has increased, you might be thinking about devoting more of your income towards your mortgage to save on the interest costs that make up a significant part of your total payout. Since a home mortgage is the largest debt obligation that you may ever have to experience, it is natural to think of repaying this debt early.

A viable prepay option is making bi-weekly payments or increasing your monthly payments to the lender.

How do Bi-Weekly Payments Work?

A bi-weekly payment means that you pay a half-payment every two weeks instead of a full payment once a month. That means your monthly mortgage check comprises of four components – principal, interest, taxes, and insurance, otherwise known as PITI. The principal component goes towards repaying the principal amount borrowed. By setting up bi-weekly payments towards your principal amount, you are not only reducing the interest that you would be paying but will also be reducing the tenure of the mortgage loan. But before rushing towards the lenders office to setup bi-weekly principal payments, here are some aspects that you must consider:

Advantages of the Bi-Weekly Mortgage Principal Payment

• During the initial mortgage repayment period, the principal component of PITI is low, the bi-weekly principal payment may not exceed $200.
• Since exercising this option is not mandatory, you can opt for this any time you want or not at all.
• The most obvious benefits are – a lower interest payment overall and a reduced loan repayment period.

Disadvantages of Bi-Weekly Payments

We’ve discussed the benefits but many real estate or financial experts advise against bi-weekly mortgage payments. Here’s why:

• There are fees required by the bank and/or lender if you decide to initiate bi-weekly payments. Some are one time only, while others may be levied every time the payment is made.
• Most experts believe that it is pointless to make extra mortgage principal payments if the mortgage rate is lower than 9 percent. The reason is, the cost savings you would derive by saving on interest (less than 9 percent) are far lower than the benefits you would accumulate by paying higher interest rate debts. It would be more beneficial if you just invested that extra money you could devote to bi-weekly payments into a mutual fund, certain individual stocks, or your company’s 401K program – if they have one. A mortgage repayment calculator would be helpful in determining the actual savings .
• The tax benefits associated with mortgage interest payments you would usually be entitled to may become reduced if you decide to exercise this option as well.
• Since you will be eliminating your mortgage payments entirely in a shorter time frame the lender may impose or saddle you with pre-payment penalties.

The Ideal Approach

If your income has increased and you want to use it wisely, the most prudent thing to do would be to clear or eliminate debt such as credit card, personal, and student loan debt for instance. If these do not exist, create an emergency savings account which can sustain your livelihood for at least six months. You can also consider paying off your car loan quicker too, if you have one.  Another route would be to invest the extra cash you earn in a certificate of deposit (CD) account or a government or corporate bond since the returns would  be higher than the benefits derived out of eliminating your mortgage payment quicker.

Before making any decisions, discuss your options with your lender. Make sure you understand all possible options and what works best for your specific situation.