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The Bi-Weekly Mortgage Plan: 13 payments a year
A bi-weekly mortgage payment program can be used to short-circuit your loan’s amortization schedule. Instead of making only 12 payments per year, a bi-weekly payment plan calls for a payment every two weeks, which adds up to 13 payments per year. When you make a standard payment, it first covers the interest you owe for the previous month’s borrowing, based on your remaining balance in mortgage interest rate. Anything over that amount must be directed toward reducing your remaining principal balance. A bi-weekly scheme actually provides a 13th monthly payment each year, and that extra must be applied to lowering your balance. At today’s mortgage rates, bi-weekly payments shorten your loan term by four years.
DIY Bi-Weekly Mortgage
Bi-weekly payment plans work, there’s no doubt about it. It’s just simple math. But there are a few reasons why homeowners may want to avoid enrolling in a bi-weekly mortgage payment plan. The first reason to avoid bi-weekly mortgage payment programs is that homeowners choosing to self-manage their bi-weekly payments get better results than via a bank-managed bi-weekly payment program. Here’s how to self-manage: rather than sending payments to the bank every other week, achieve the same result by making your regular mortgage payment once monthly, then adding 1/12 of your regular mortgage payment to your check. For every $1,200 in your mortgage payment, add $100 to your monthly payment. By sending $1,300 to your lender monthly, you’ll “overpay” your mortgage by $1,200 annually, which is a 13th payment. Look at how the math works :
- Bank-managed bi-weekly mortgage payments pays off in 26 years, 0 months
- Self-managed bi-weekly mortgage payments pays off in 25 years, 11 months
This math works because banks don’t apply that 13th payment until the year is complete. By contrast, your self-managed system applies 12 times per year. If your bank is charging for its bi-weekly mortgage payment program, just say “no”.
Bi-Weekly Mortgage? There may be a better way
While it’s proven that the bi-weekly repayment scheme can save you money, there may be better options. If you don’t expect to keep your home for many more years, refinancing to a hybrid ARM with a much lower interest rate (5/1 ARM rates often run about 1 percent lower than 30-year fixed rates), while making the same higher payment, could take a bigger bite out of your mortgage faster. Alternatively, if you’ve been paying your mortgage for a longer time period, you may be able to refinance into a 15-year mortgage (15-year mortgage rates typically are .5 percent lower than 30-year mortgage rates) and save both time and interest in a big way.
*This article does not represent legal interpretation or advice. This is not a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet LTV requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines, and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over life of loan. Reduction in payments may reflect longer loan term. Terms of the loan may be subject to payment of points and fees by the applicant. Seattle Mortgage Brokers, LLC NMLS: LO# 305371 MB# 761615