- What is a bi-weekly mortgage payment?
When you finalized your mortgage with your creditor, you agreed to pay a monthly rate in exchange for the loan. The payment would either be fixed or subject to rate adjustments throughout your term. You even had to decide how much time you needed to pay back the borrowed funds.
The more time you take to pay back your loan, the more interest you end up paying. However, it can often be too costly for most homeowners to pick a mortgage that amortizes over 15 years or less. When taking on a financial obligation, you have to consider what you can afford above all else. Next to that, taking on a mortgage is a big transition in life. If it was your first home, you still had to consider the costs of furnishing your new place.
Regardless if you closed your mortgage a couple months or years ago, at some point, you might feel ready to take on a bit more with your payments. Bi-weekly payments are half of your monthly mortgage, sent in every two weeks. With bi-weekly mortgage payments, you'll pay off your loan sooner to reduce the amount of interest you're paying.
Eventually, the weeks add up, and you'll have made one extra monthly payment by the end of the year. In other words, instead of making twelve payments, you’ll have made thirteen. Since most months contain an average of 4.3 weeks, it’s easy to see where the time is made up.
- Making bi-weekly mortgage payments
If bi-weekly mortgage payments sound right for you, you’ll have to consider how you want to make the arrangements. You could set up automatic transfers with your creditor or send in the additional payments on your own accord.
Setting up EFT (electronic fund transfer). Typically, your creditor can setup bi-weekly billing for a small service fee. Alternatively, your loan issuer may get a third-party company to manage your bi-weekly payments. EFT is beneficial because it automates the payment process for borrowers with a busy lifestyle. However, it can pose a problem for homeowners that might struggle to keep up with the payments. It can be costly to revert to monthly billing and damage your credit if you aren't on time with payments.
Further, your additional payments don’t come into play until the twelve subsequent payments are completed. That means your additional funds can sit in an escrow account, without making interest, for many months at a time.
Issuing your accelerated payments. To skip additional service fees and make interest on your holdings, you are better off to send in the extra payment on your terms. Merely transfer 1/12th of your current monthly payment into a qualified savings account each month. Then, at the end of the year you’ll have saved up an extra payment to send in, and earned some interest too. Plus, you can set up automated transfers between your personal and savings accounts each month.
For example, let's take a 30-year, fixed rate mortgage for $250,000 at 4% interest that is already 5 years into the term. The monthly payment is $1,193.54, while the bi-weekly payment is $596.77. With bi-weekly payments, you’ll save over $21,000 in interest and shave off 3 years from your existing term.
To do this on your own, you would transfer $99.46 ($1,193.54 monthly / 12 months = $99.46) to your savings each month. Then you’ll send in one extra payment at the end of the year – just make sure to write in the memo, “apply to principal”.
In one month, $100 is equivalent to a few trips to the movies, one night at a restaurant, or buying 2$ coffees and a 3$ snack from Starbucks five days a week.
Remember to bookmark this page and save it to the home screen of your smartphone. You can return to assess your situation as your finances or payment abilities change. If you found this page useful, please follow us and promote us on social media by using the share feature.
- How to use the calculator
The calculator is very straightforward to use. You just need to add some existing mortgage details to model the benefits of bi-weekly payments for your loan. Let’s review this together.
Step 1. On the first line of the calculator, add your first payment date. You can use the calendar or your keyboard to make the input easier. The date of your first payment is essential to illustrate the savings you can still gain from bi-weekly payments, so you may want to verify the information for accuracy.
Step 2. You can add your original mortgage amount and term to the second and third line. With this method, you won’t have to guess how much time is left or what the outstanding balance is. Our system will figure this out for you.
Step 3. On line three, include the interest rate on your mortgage.
Step 4. Finally, if you have been doing anything else to pay off your mortgage sooner, add it to line four or five, next to monthly escrow or monthly prepayment amount. Monthly escrow refers to funds paid in advance to a trusted third party. An escrow payment can only be released when both sides fulfill their obligation under the terms of the contract (without any breach). Meanwhile, monthly prepayment refers to any additional funds made directly to your principal, on top of your monthly dues.
Step 5. Please view your results.
- Your results
Once you have completed the questionnaire, you can view your results. Immediately to the right of the inputs, you will receive a smart summary of your loan information. Here you can find your payments and interest according to monthly or bi-weekly billing schemes. The monthly payment should seem familiar to you; otherwise, you may want to review the information you provided.
Directly below the questionnaire, you can view a prompt of how much interest you can save from accelerating your payments. Often it can be surprising to see how one extra payment per year can pay off in the grand scheme of things. If you have children, your interest savings could help you fund their college enrolment.
For more detailed information, you can view the three integrated reports: biweekly repayments, mortgage payoff schedule, and compared to refinancing.
Biweekly repayments. The first chart shows the difference that bi-weekly payments can make concerning the length of your term. Follow along with monthly payments in green, or biweekly payments in blue, to see when you will pay off your loan entirely. When you start biweekly payments early enough, you can become debt free many years sooner than you would expect.
Mortgage payoff schedule. The next tab provides an itemized summary of your annual dues for biweekly and monthly payments. You can also view the remaining balance in both scenarios. You'll likely notice that the biweekly payments will pay off the loan before a monthly billing structure. The sooner you begin biweekly payments, the faster you’ll become debt free.
Compared to refinancing. If interest rates have dropped since you obtained your mortgage, you could potentially benefit from refinancing the loan. The last line in the table illustrates what interest rate you would need to refinance at to achieve the same savings that you would get from accelerated payments.
With this information, you should be able to make an informed decision about accelerating your payments. You may have to review your budget to see where you can free up some additional funds if you haven't already. Ultimately, you can save tens of thousands of dollars and have a home that is free and clear many years in advance.