Bi-Weekly Mortgage Payments

With a standard fully amortized mortgage the borrower makes twelve mortgage payments over the course of each year and the mortgage is paid in full at the end of the specified term of the loan.

But here’s an interesting phenomenon. If you pay exactly the same amount of money each month, but instead of making your payment on, say, the 1st of every month you split the payment in two and pay exactly one half of your normal monthly mortgage payment every two weeks, that is, every fourteen days, a remarkable thing happens.

You will reduce your 30-year mortgage by at least 6 years (in many cases by as many as eight years) and you will save several thousand dollars in interest payments.

How can this be when you are paying the same amount of money, only paying it in smaller increments more frequently?

The trick lies in the fact that by paying bi-weekly you are not really paying the same amount of money. If you simply divide twelve monthly payments in two then you are making 24 half-payments a year. However, if you make a half-payment every 14 days, then you end up making 26 payments per year, rather than 24 payments. In other words you will end up making the equivalent of thirteen monthly payments each year instead of twelve.

That extra monthly payment each year, applied toward paying down your principal, makes all the difference in the world and accounts for paying off your mortgage years earlier and accounts for saving thousands of dollars in interest over the course of the loan.

There are companies which claim to help you in making your two monthly payments rather than the more typical single monthly payment. These companies charge a fee for doing this, which cuts into whatever savings you will realize by making the bi-weekly payments. Many banks are now willing to set up a bi-weekly payment schedule for their borrowers. Again, this will involve a fee which cuts deeply into your interest savings. Yet, on the positive front, in both cases you will be able to pay off your loan several years sooner than scheduled.

Rather than paying a fee to have someone else remind you to make an extra monthly payment each year, why not just do it yourself? Here’s how it works. Assume your normal monthly mortgage payment is $1,000. Divide $1,000 by 12. This gives you $83.34. Simply add the $83.34 to your monthly payment every month and specifically request that the $83.34 be applied to your principal. Your loan will be paid off years sooner and you will save thousands in interest payments.