Can Bi-weekly Mortgage Payments Save You Money?

Can Bi-weekly Mortgage Payments Save You Money?

Outside of a low-interest rate, there are very few ways to save money on your mortgage. On a fixed-rate loan, the payments remain the same month to month, but there is a surprising tactic you can use to save even more. By making your mortgage payments biweekly, instead of once per month, you can pay off your loan more quickly and spend less on interest. Here’s a closer look at how that works.

How a Biweekly Mortgage Plan Works

With a biweekly mortgage repayment plan, divide your monthly in half. Instead of paying the full amount once per month, you will pay the partial amount every other week. The Lender still receives the total amount monthly, so they are satisfied.

However, because there are 52 weeks in the year, not 48, you end up making a full extra mortgage payment with this plan. Anything additional you pay on a mortgage goes entirely to the principal, rather than being divided between interest and principal.

How You Can Save with Biweekly Payments

So how does this look when you crunch the numbers? Imagine you have a monthly mortgage payment of $1,200. Instead of making that payment once per month, you will make a payment of $600 every two weeks. Multiplying that $600 by 26 weeks and you give your Lender $15,600 by the end of the year. That is $1,200 more than you would pay if you paid once per month.

So how does that help you save? Let’s look at the interest savings. If you have a loan of $100,000 that is a 30-year loan at 6.5 percent interest, the total amount of interest you pay over the life of the loan is $127,544. If you pay your mortgage biweekly, paying down the principal balance faster, you spend only $97,214 on interest, which saves you $30,329 over the loan’s lifetime. The larger the balance or, the higher the interest, the more you will save.

How to Set Up Biweekly Mortgage Payments

If you want to take advantage of this savings venue, you need to set it up with your mortgage Lender. First, contact your Lender and let them know you want to enter this type of payment arrangement. Ask them how they will credit your payments. You want them to credit your extra payment as an additional payment, so it is applied to the principle. Also, you want to ensure that your Lender credits each half payment when they receive it, rather than waiting until you pay in full for the month. That’s the only way you will see the benefits of the extra payments.

What if the Lender Doesn’t Offer Biweekly Payments?

Not all Lenders will allow their borrowers to enter into biweekly payment arrangements. If yours is not willing, you can do the job on your own. Divide your monthly mortgage payment by 12. Then, each month, make an extra payment for principal pay down that equals that amount.

So, if your monthly mortgage payment is $1,200, you would divide that by 12 to get $100. Every month, add a $100 principal balance payment to your mortgage. You will save in the same way that you would with your biweekly payments.

Another way to do this would be to put aside the biweekly payment amount into a savings account every two weeks, then draw from that savings account each month when your monthly payment is due. Then, at the end of the year, make an extra payment to place towards the principal. Just make sure that you communicate with the Lender that you want the additional payment used for the principal, not as a regular monthly payment.

This nifty little trick makes little difference in your day-to-day budgeting, but it can make a big difference in how much you pay for your loan. Consider the biweekly agreement with your Lender if you’re looking to build equity and pay down your principal more quickly.

Contact me, Drew, for more information about how bi-weekly payments work.

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