How a Bi-Weekly Mortgage Works

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Author: Leslie Silver

Would you like to save thousands of dollars on your mortgage and get it paid off sooner? One way to do that â€" and perhaps avoid an early payment penalty â€" is to arrange for a bi-weekly mortgage payment arrangement. It’s an option that is growing in popularity as homeowners seek more flexible ways to manage and pay off their mortgages. If you have considered a bi-weekly mortgage but are uncertain how one works, or if you’ve never heard of a bi-weekly mortgage, here are some nuts and bolts facts to help you understand.

What is a bi-weekly mortgage?

A bi-weekly mortgage is just what it sounds like â€" a mortgage where you make payments every two weeks rather than once a month. Instead of making 12 monthly payments each year, a person with a bi-weekly mortgage would make 26 payments each year, one every two weeks.

What are the advantages of a bi-weekly mortgage?

The biggest advantage of a bi-weekly mortgage is that you are essentially making one extra monthly payment each year. That’s because there are only 12 months, but because each quarter of a year has an extra week, there are 26 two week periods. That means that you pay 26 payments instead of 24, paying your mortgage debt down faster.

Generally, that extra payment will be applied directly to the principal of your mortgage rather than being used toward paying off interest, which will reduce your mortgage far faster.

How much can you save paying your mortgage bi-weekly instead of monthly? Quite a bit, it turns out. Imagine that you are paying off your mortgage at $1,000 a month, or $12,000 a year. If instead you choose to pay one-half your monthly mortgage payment every two weeks, you’ll be making 26 payments of $500, or $13,000 a year â€" and $1,000 of it will be applied directly to your principal.

To look at it another way, take this example. If you are paying off a 30 year fixed rate mortgage of $150,000 at 5.02%, you’ll pay $808 monthly, including a total of $140,545 in interest on that loan, and it will take you 30 years to own your home free and clear. If, on the other hand, you make a payment of $404 every two weeks, you’ll have your mortgage paid off in just over 25 years, and pay just $115,319 in interest. That’s a savings of over $25,000 on your mortgage. Imagine what you could do with an extra $25,000?

In addition, most people budget monthly, but are paid weekly or bi-weekly. Paying your mortgage bi-weekly can actually make it easier to budget.

What are the risks or dangers of a bi-weekly mortgage?

The most common downfall people encounter when seeking a bi-weekly mortgage is not understanding the terms of the agreement that they are signing. There are companies who will take advantage of the confusion about bi-weekly mortgages by offering to ‘convert’ your mortgage into a bi-weekly mortgage for a one-time fee. You should be able to negotiate bi-weekly mortgage payments directly with your lender, and it shouldn’t cost you a thing.

If you are considering a bi-weekly mortgage, watch for these things:

- Ask your lender if your extra payments will be applied directly to the principal. While you’ll still realize some savings if the additional two payments a year are apportioned between principal and interest, those savings will be nowhere as gret. - Make sure that the payments are every two weeks, not just twice a month. The advantage in paying a bi-weekly mortgage lie in those extra two payments â€" essentially paying 13 months worth of payments every 12 months. If you’re just making two payments â€" say one payment on the first and one on the sixteenth of each month â€" you won’t see any savings at all. - How much will it cost you to enroll in a bi-weekly mortgage payment program? Many banks offer convenient bi-weekly payment programs for their mortgage holders, but some come with a hefty price tag. According to Bankrate.com, four of the five major mortgage servicing companies offer bi-weekly mortgage plans with automatic deductions from your checking account. Their fees range from $295 to $379 to enroll you in the program, with additional charges for each transaction. By contrast, if you simply make half your mortgage payment every two weeks, the transaction costs will run you less than $10 a month. - Check with your mortgage lender to see if you can set up a DIY bi-weekly mortgage payment. Some lenders refuse to accept partial mortgage payments at all, while others will be happy to work with you.

Leslie Silver is a freelance writer who offers information about mortgage refinance.