The Bi-Weekly Payment Plan is a convenient mortgage budgeting plan that can help you save thousands of dollars in interest and pay off your mortgage sooner. The biweekly mortgage payment plan is pretty easy to set up, as there are 3 different ways to make payments that will accomplish the same result.
Typical Mortgage = 12 Payments Per Year
The typical mortgage asks for one payment per month, which equals 12 payments per year. With a 30-year fixed rate mortgage, therefore, 360 payments are required to pay the loan in full. Each mortgage payment is split into two parts — a principal portion and an interest portion. The principal portion is applied to the amount that you owe the bank. This diminishes your remaining loan balance. The interest portion is your cost for borrowing from the bank.
As your loan moves toward maturity, the balance between your mortgage payments’ principal-and-interest shifts. In the early years, a significant portion of your payment is comprised of interest and just a small part goes to paying down your balance. It’s not until later in your loan’s life cycle does the principal portion of the payment start to grow.
Bi-Weekly Mortgage Payments = 13 Payments Per Year
Here is the first way to make bi-weekly payments on your mortgage.
1. A bi-weekly mortgage payment program is meant to short-circuit your loan’s amortization schedule. Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year.
Except that you can’t make 13 payments per year on your mortgage — that’s not how a mortgage works.
With a mortgage, you pay a certain amount of interest on an annual basis and that amount is covered in your first twelve payments. The 13th payment has to go somewhere, though, so it gets applied to your principal balance; the amount that you still owe to the bank.
And, this is how a bi-weekly payment plan works. With each “13th payment”, your loan balance is reduced by the entire amount of the payment. You reach your loan’s payoff date sooner.
At today’s mortgage rates, bi-weekly payments shorten your loan term by at least 5-6 years. See below an example of a Bi-weekly payment plan on a $200k mortgage, you will end up saving 6 years off your mortgage and a total of $68,284 in interest and payments.
Two Effective Alternatives To Bi-Weekly Payments
Bi-weekly payments plans work; there’s no doubt about that. It’s just basic math. There are two other ways you can self-manage your bi-weekly payment plan, so you accomplish the same goal of paying off your mortgage faster.
Here’s how to self-manage:
2. Rather than sending payments to the bank every other week, you can achieve the same result by making your regular mortgage payment once monthly, by adding 1/12 of your regular mortgage payment to your check each month.
For every $1,200 in your mortgage payment, in other words, add $100 to your monthly payment. By sending $1,300 to your lender monthly, you will “overpay” your mortgage by $1,200 annually, which is a 13th payment.
3. The 3rd and final way to accomplish the bi-weekly program, is to just send in one extra monthly payment a year. Some people do this after they get their tax refund or a bonus from work. This will accomplish the same result as the other two methods above, as the goal is just to pay an additional payment to principal each year.
Is it Better to Self -Manage Your Mortgage Payments?
One reason to skip the bi-weekly mortgage program is that bi-weekly payments are a contract and once that contracts starts, as a homeowner, you’re obligated to make those 13 payments per year no matter what.
By contrast, with a self-managed payment plan, you never have that obligation. You can choose to skip a month during the holidays, for example, then double-up on payments later on, or not at all. It’s all in your control — not the bank’s.
And, lastly, if you find your bank is charging for it bi-weekly mortgage payment program, I would say “no”, as that’s just wasted money. As you can see above, you can self manage this plan easy enough.
I hope you found these tips helpful. If you have any questions about how to set up a Bi-Weekly plan, or if you know anyone that is looking to refinance or purchase a home, feel free to contact me directly at 858-200-9602.