Bi-Weekly Payments…..The Real Deal
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In order to save money and maximize the services offered by almost all major banks, you can set up bi-weekly payment plans yourself. If you bank online, this process is even easier. If not, you can visit your local branch and get assistance there to create this payment schedule.
First, look at your monthly mortgage payment (including escrow if you are impounding for taxes and insurance) and multiply it by 12. Once you have that number, divide it by the number of paychecks you receive in a year whether it’s 24 or 26 or 52. Set up an automatic draft for that amount to be drafted from your account and paid to you mortgage each payday.
Second, and this is very important, you must make sure you are ahead in your payments by at least 2 weeks, preferably a whole month, before you set these drafts up. Do not start these drafts at the beginning of a month assuming that you will stay current because you may not.
The way some banks process their automatic drafts, especially when they are first being established, may result in a 2 to 3 week delay for your mortgage lender to actually receive a payment from the bank. If your timing is off at all, it could result in the lender either charging you late fees or worse reporting a late payment on your credit record. Late mortgage payments are one of the most derogatory credit issues you can have on your credit report.
This is easily avoided. The best way to do it may make budgeting for a few weeks a little difficult if you’re already having money issues but the reward is well worth the extra tightening you might experience in the short term. (And it is still less expensive than paying the mortgage company a set up fee.) You need to pay your entire monthly mortgage on the first of the month as you usually do and, at the same time, start your first draft payment.
So, in essence, you are making a payment and a half or so that first time, so you are a half or so payment ahead in the beginning. By the next paycheck around two weeks later, you are making another half payment to the mortgage and now you are a month ahead in your payments. Now, as time goes forward, your mortgage is having the principal reduced every 14 to 16 days and you are always paying a month ahead.
With this strategy, you will reduce your mortgage quickly, have an easier time budgeting your mortgage payments and you will never have to worry about a late payment.
A later post will provide a checklist for easy reference when you start your bi-weekly payment schedule.