Can I Split My Mortgage Payment to Pay It Off Faster?
Optimize your mortgage payments to shorten your loan term and reduce total interest paid.
Homeowners often explore options to accelerate their mortgage payoff by adjusting payment frequency. This approach can lead to substantial savings and reduced loan terms. Understanding these alternative payment schedules and their implications is important for homeowners considering such a financial strategy.
Understanding Mortgage Payment Frequency
“Splitting” a mortgage payment typically refers to making more frequent, smaller payments rather than one large monthly payment. The most common method involves bi-weekly payments, where half of the regular monthly payment is made every two weeks. Since there are 52 weeks in a year, this results in 26 half-payments annually. These 26 half-payments collectively amount to 13 full monthly payments over the course of a year, instead of the standard 12. This strategy systematically incorporates an additional full payment into each year’s schedule, effectively making an extra principal payment annually.
Benefits of More Frequent Payments
Adopting a more frequent payment schedule, such as bi-weekly payments, offers notable advantages. The primary benefit is significant interest savings over the life of the loan. By making the equivalent of an extra monthly payment each year, the principal balance of the mortgage is reduced faster. This accelerated principal reduction means that less interest accrues on the outstanding balance over time, as interest is calculated on a diminishing principal. For example, a 30-year mortgage could be paid off several years earlier, potentially saving tens of thousands of dollars in interest. Additionally, more frequent payments can align well with bi-weekly paychecks, making budgeting simpler for some individuals.
Arranging More Frequent Payments
Implementing a more frequent payment schedule often begins by contacting your mortgage servicer to inquire about their bi-weekly payment programs. Many lenders offer official programs where they collect half of your monthly payment every two weeks. It is important to confirm with your lender how these payments are applied; ideally, each half-payment should be applied directly to the principal and interest portion of your loan as it is received, rather than being held until the full monthly payment is accumulated.
If your lender does not offer a bi-weekly program, or if their program involves fees, you can create your own accelerated payment strategy. One common method is to divide your regular monthly principal and interest payment by 12 and add that amount to each of your 12 monthly payments. When making any extra payments, it is important to clearly designate that the additional funds be applied directly to the principal balance to maximize interest savings.
Important Considerations for Payment Frequency
Not all mortgage lenders offer official bi-weekly payment programs, and policies regarding these payments can vary significantly. It is important to confirm with your lender how extra or more frequent payments are applied; they should be directed specifically to the principal balance.
Consider the impact on your escrow account, which typically covers property taxes and insurance. While your principal and interest payments might be more frequent, your lender often still manages escrow disbursements monthly or annually. You may need to monitor your escrow balance or discuss adjustments with your lender to ensure sufficient funds are collected, as the bi-weekly schedule might affect how escrow contributions are perceived.
Be aware of potential fees associated with lender-offered bi-weekly programs or third-party services, which can range from setup fees (e.g., $250-$400) to small transaction fees (e.g., $2 per payment). Confirming payment application dates is also important to avoid accidental late fees, particularly if managing payments manually.