In today’s mortgage environment, gone are the speculative years where new homeowners were just interested in buying and selling a home as quickly as possible to make a quick profit. We are entering a new era of homeownership where pride of homestead and long term thinking are the new norm. Homeowners are now searching for different tools to help them payoff their mortgage sooner. There is no better tool to help you payoff your mortgage faster than the biweekly mortgage payment plan.

What is a biweekly mortgage?

Did you know the typical biweekly mortgage plan can shave off 6 years on a 30 year  mortgage? Bi weekly payment plans are pretty simple. Here is how it works. You pay the bank half of your monthly mortgage bill every 14 days. In other words, on a $417k mortgage at 6%, rather than paying your bank the mortgage payment of $2500 every month, you’d pay $1250 every two weeks.

When you pay your mortgage monthly, you make a total of 12 payments per year. There are 52 weeks in the year. So that means by paying every other week you make 26 half payments, or the equivalent of 13 full mortgage payments per year.  By doing so, you end up making one extra monthly payment per year.

 It pays to pay biweekly

In the above example, a homeowner with a $417k loan amount at 6% interest on a 30 year fixed loan, will save $103,755 in interest over the term of his loan and payoff his home in just over 24 years. This saves the homeowner over 23% of the interest on the loan!

You can control the rate of interest

With interest rates now on the rise, this is a great tool that all homeowners can use to control the rate of interest they will pay back on a loan. On the above example, because the homeowner saved 23% of the interest on their loan, they dropped their effective interest rate from 6% down to 4.9%. At some point this year rates will rise to 6%, so this is a program that will help rising interest rates.

What if I can’t pay biweekly?

 A question I get asked a lot is, “What if I pay my mortgage on the 15th and the 30th of the month, will this plan still work? This will not have the same effect as the bi weekly plan. It is effectively the same as paying your mortgage once a month, because you are just paying the bank the same amount of money every 30 days.

Of course some people only get paid once a month or twice a month, so making bi weekly payments may not work for them financially. Here are the other two ways to make the biweekly plan work without having to make biweekly payments. If you do want to prepay your mortgage, you can achieve the same results by adding the equivalent of 1/12 of a month’s mortgage bill to your regular monthly payments. Or lets say at tax time you get a nice refund, you can use some of your refund to apply one full month’s payment directly to principle once a year. Remember the secret to the bi weekly plan is that you are making one full extra payment to principle every year.

The new era of homeownership

Most people dream about having no mortgage payment for retirement, this is a program that will help you achieve this goal faster. As far as I know most lenders now offer homeowners the option of different payment plans to make this biweekly mortgage plan work. Call up your current service provider and discuss with them the different payments options they have. Make sure that the servicer will immediately credit each biweekly payment upon receipt, and the easiest way to do this is by automatic deduction from a bank account.

If you are interested in getting more information on this topic, or you want access to a biweekly calculator to input some figures, feel free to contact me directly at 858-200-9602 and I will be happy to share this information with you.

Your mortgage planner

Michael