Chances are that if you have a mortgage currently you’re making monthly payments. The typical mortgage is structured so that you make a single payment each month for a total of twelve payments per year. The good thing about this is that it means you pay the same amount at the same time each month so there are no surprises and it’s easy to budget for. But what would happen if you split that monthly payment up and made bi-weekly payments? Surprisingly, you could save yourself tens of thousands of dollars and cut years off of your mortgage. Here’s how.
How Bi-Weekly Payments Work
The magic of the bi-weekly payment comes from the fact that there are 52 weeks in a year, thus you’d have 26 payments. If you were to simply make two payments a month that would be just 24 payments in a year, so actually the bi-weekly method has you making two extra payments each year, which is the same as making one extra monthly payment.
Here’s an example. Let’s say your current monthly mortgage payment is $1,000. Over the course of a year you will spend $12,000 on twelve payments. If you decided to make bi-weekly payments you can then make a $500 payment every two weeks. Seems like the same thing, right? Well, if you take $500 and multiply it by 26 payments you have $13,000 in total payments. And guess what? That extra $1,000 was applied directly to your principal, thus reducing how much you’ll spend on interest and will pay your mortgage off faster.
To better understand the true savings, on a $100,000 30-year mortgage at 6.5%, you'll pay $127,544 in interest, plus the $100,000 principal, for a total of $227,544. Paying one-half of your regular monthly mortgage payment every two weeks will result in interest of $97,215, a savings of $30,329. Obviously, the larger your mortgage and higher your interest rate, the greater the savings.
How to Make Bi-Weekly Payments
So, switching to a bi-weekly payment is as simple as splitting your monthly payment in half and making a payment every two weeks, right? Well, not so fast. While that is the general idea, you do want to check with your lender first. For one, you might already have an established automatic payment and you’d want to make sure you could stop that. Otherwise you might find yourself paying even more.
Also, make sure that your lender will accept bi-weekly payments. While most lenders should, there are cases where they will not, or if they do, might not automatically apply the extra to the principal. You must have a lender that will immediately credit each half monthly payment upon receipt. If your lender waits until the second payment has been received before crediting your loan, you'll never see the benefits.
Finally, make sure there isn’t a penalty for prepaying your mortgage. Most mortgages these days do not have a prepayment penalty, but there are still some out there that will penalize you for trying to pay off you mortgage early. It’s sad, but true. So just be sure that you won’t be doing more harm than good by trying to make extra payments.
Things to Watch Out For
Making bi-weekly payments is a very useful tool, but be careful of scams or special programs that claim they can do this for you. I’ve seen some companies offer to convert your monthly mortgage payment into bi-weekly payments for a one-time fee of about $400. Run away from these offers. It shouldn’t cost you anything to make extra payments on your own loan. Even if your lender won’t accept bi-weekly payments you can still achieve the same results by making a single extra monthly payment once each year.