Extra Annual Payments
While many mortgage companies now offer the homeowner an option to pay their mortgage every two weeks instead of once a month, there is often a fee involved. Rather than pay the additional fees, a homeowner can undertake this payment method on their own. First, it is important to remember that if this is done at the beginning of cycle, the monthly payment should be made on time. Here is what a typical plan may look like.
Decision made - You have made the decision to begin paying off your mortgage earlier by making payments twice a month instead of once a month. To do this, you will divide your current mortgage payment in half and send one half every two weeks. Through the course of the year, instead of making 12 payments, you will have made 26 payments. In reality, this means that you have made one full extra payment throughout the year (12 X 2 = 24, 26 - 24 = 2 and 2 = one full payment). Let us assume that you have made this decision in August.
First payment - In order to ensure that you do not fall behind on your mortgage, you will have to make your first full mortgage payment on the regularly scheduled date. For most homeowner's this will mean that on the first of the month, you will make a full payment. Assuming that your mortgage payment is $1,200 a month, you will mail the mortgage company another payment of $600 in the middle of the month (1/2 payment), and then another half payment at the end of the first month which will pay the mortgage for following month.
After 12 months - Since there are 52 weeks in a year, by the same month of the following year, you will have made 26 half payments on your mortgage. This means that you have paid 13 months of full mortgage payments. Most homeowners will then need to contact their mortgage company and ask that they recalculate the amortization on the loan. There are specific reasons for this: (a) it may reduce your overall payment since you have reduced your overall indebtedness and (b) those who have been paying personal mortgage insurance (PMI) may be eligible to have it removed from their mortgage.
Important note: It is important that the lender understand that the extra payments are to be placed towards the principal of the loan. If a homeowner does not specify this, the lender may simply continue to debit the overall burden.