You probably already know not to believe every piece of credit or financial advice that crosses your desk. There are countless strategies that some expert somewhere has endorsed as being the best thing since sliced bread. Some of these strategies are worth exploring, while others may be ineffective or otherwise not worth the investment.
As a homeowner, you may have heard that making multiple, smaller mortgage payments each month rather than just a single, full payment is ideal. And there are companies that will gladly charge you to facilitate said multiple payments. But, is there really an upside to paying more often?
The Credit Improvement Myth
For starters, let's address the myth that making your mortgage payment in increments rather than just a single monthly payment will somehow help to improve your credit scores. It won't. Credit scoring models like FICO and VantageScore are designed to focus solely on whether or not your payments are made on time. As long as you make your full mortgage payments by the due date, there is no added credit score benefit associated with breaking your mortgage payment down into smaller bites. Further, your mortgage lender or servicer doesn’t report that you made multiple payments to the credit bureaus. They instead report once every month, so their reporting cycle doesn’t capture that you made more than one payment.
The Real Potential Benefits
Although paying multiple monthly payments toward your mortgage may not help your credit, if your mortgage is set up to allow early payments, and most are, there may be some potential for you to save money by using the strategy. Before you can determine whether or not making multiple mortgage payments will net you any savings, you will need to find out how the interest on your loan is calculated.
If the interest on your loan is compounded monthly, multiple payments probably will not benefit you. If, however, the interest on your loan is compounded daily or is based on the monthly average balance, making multiple monthly payments might be worth your effort.
Bi-Monthly vs. Bi-Weekly
If you are considering making multiple mortgage payments each month in an effort to save money on interest, it is important to understand the difference between bi-monthly mortgage payments and bi-weekly mortgage payments. Bi-weekly payments should probably be your goal.
The chart below shows the difference between these two mortgage payment strategies. (Remember, your lender must allow early payments and the interest on your loan must not be calculated monthly or neither of these payment strategies will likely be very effective.)
|Bi-Monthly Payments||Bi-Weekly Payments|
|You make two half payments per month (e.g. 1st and the 15th) to your mortgage lender or servicer.||You make a half payment every two weeks to your mortgage lender or servicer.|
|24 Half Payments Per Year = 12 Full Payments Made||26 Half Payments Per Year = 13 Full Payments Made|
Since there are 52 weeks in a year, using the bi-weekly payment method above would actually result in you making one extra mortgage payment annually. Over time, those extra payments will add up, allowing you to potentially pay off your mortgage early and save thousands or tens of thousands of dollars in interest over the life of your loan.
Finally, it is worth noting that there are companies that may offer to enroll you in a program designed to manage bi-monthly or bi-weekly mortgage payments for you. However, depending upon how these programs are priced, they could limit your savings potential. The truth is that you can manage your bi-weekly mortgage payments completely on your own, at no cost.