September 21, 2021
Why do some borrowers–those applying for FHA loans or otherwise–choose to make bi-weekly payments on a mortgage? That is, why do some choose to pay two mortgage payments each month?
Paying ahead on an FHA home loan is not a new idea nor is it a bad one. There are those who pay more on their home loans each month to gradually whittle down the amount they owe on the loan so that payoff comes earlier.
And there are several ways to do that, as we’ll explore below.
Unlike some other types of loans, FHA mortgages do not come with a pre-payment penalty and you cannot be billed extra for early payoff of the FHA loan amount.
The multiple ways to pay ahead and pay down your mortgage earlier than the actual loan term include having your loan officer enroll you in a bi-weekly payment plan.
Why every two weeks? The government watchdog agency, the Consumer Financial Protection Bureau explains it like this:
“In a bi-weekly payment plan, the mortgage servicer is collecting half of your monthly payment every two weeks, resulting in 26 payments over the course of the year (totaling one extra monthly payment per year).”
That is because there are 52 weeks in a year and many people think of a calendar month as being exactly 30 days long.
When you do the math over a period of 52 weeks you’ll see that paying biweekly does provide an advantage. That extra payment per year over a 15 year or 30-year loan means an important reduction in your principal balance.
“By making additional payments and applying your payments to the principal,” CFPB explains, “you may be able to pay off your loan early. Before choosing a bi-weekly payment, be sure to review your loan terms to see if you will be subject to a prepayment penalty if you do so.”
That warning is for borrowers who are not applying for an FHA mortgage, as FHA home loans do not permit prepayment penalties.
But you should definitely ask the lender if there are fees to be set up on a bi-weekly plan and decide whether you want to make it an official part of your mortgage payment process or do it without a formal plan set up by your lender.
If you choose to approach the mortgage in a bi-weekly manner but do not ask your loan officer to formally set up such a plan, do not ignore the due date on your monthly payments as missing that date can hurt your credit scores. Even if you pay half ahead of time, if you miss the due date, it’s not good for your FICO scores.
And there is nothing wrong with simply paying more one time a month instead of splitting up two payments.
It is a very good idea to set up an auto-deduction to set aside your mortgage payment every month if you don’t use another alternative–when setting up any automatic payment or transfer, it’s best to do it a couple of days earlier than the due date whenever possible just in case there is an error or problem.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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