Will biweekly mortgage payments save you money?
Here’s how to do the math to see if paying more frequently is a smart option.
Question: I refinanced two years ago and received an offer to pay biweekly instead of monthly. Will this help to reduce my mortgage more so than with monthly payments? If so, how and where can I apply? (Bing: How low are interest rates right now?)
Answer: Making biweekly payments on your mortgage will absolutely cut your interest cost and shorten the term of your loan, to boot. Such an arrangement usually is set up as an automatic debit from an account you specify. The mortgage lender will sweep through that account every two weeks and collect exactly half of your required monthly payment.
How does it work?
While there are only 12 months per year, there are 26 two-week periods. This means you are essentially making 13 monthly payments per year. In today's market, this can save you a bundle, especially if you start counting from the first monthly payment, because it reduces the term of a 30-year loan to about 25 years.
How much are the savings?
On a $200,000 mortgage at 5%, you'll cut the total term by just about five years, while shaving off more than $34,000 in interest cost.
Biweekly payments can be valuable, but there's no magic to them. In fact, if you are responsible and dedicated, you can simply send in an extra monthly payment once per year and achieve nearly the same savings. The biweekly plan just makes it happen automatically.
That said, you should check the fine print. While it's OK for a lender to charge you a one-time setup fee, watch out for any recurring transaction fees that could diminish your savings over time.
Big PAPA JD
You need to get yourself informed sir.
Interest on a mortgage loan is calculated monthly on the unpaid balance each month. The interest is collected in arrears - ie: last months interest and current month reincipal is paid each month. If your principal and interest payment is $1,000. and you pay an extra $100, then you no longer pay interest on the extra $100 principal payment made.
I was in banking for 36 years and specifically worked in the mortgage area for 22 years.
NEVER pay a fee to setup a bi-weekly mortgage.
Do one of 2 things.
1. If you have a 30 year mortgage, pay the payment for a 15 or 20 year loan each month.
2. A bi-weekly mortgage has 26 bi-weekly or 13 monthly payments. Divide one payment by 12 and pay this much extra each month.
Make sure you designate this extra money as a principal payment when submitted.
A 30 year mortgage paid as bi-wwekly payments will payoff in about 22 years A bi-weekly is really a gimmack..
what most people don't understand is that interest is compounded daily on your mortgage, not monthly, and not biweekly. That means that if you pay your mortgage a couple days early every month and make sure that it is actually being posted to your account early as well, then you will also save a penny here and there on your principal. True bi-weekly payments save you money and cut time off your mortgage in the end and thats all there is to it. Think of it like this: If you are carrying a $100k balance on your mortgage next month and it is a 30 day month, the interest is figured daily for 30 days on $100k. But if you make two payments a month, one on the first and one on the fifteenth, then you have fifteen days of the interest compounded on the $100k. When you make that first payment, it lowers your principal, so then you would have the other fifteen days of interest compounded on the principal balance that is just a little lower, probably $99k and some change just depending on the details of your mortgage.
That is not to say that all banks are not honest about this and when you sign up for bi-weekly payments or anything like that, they may hold the money and apply both the payments to the account at the same time. This can be deceiving, or it can be done to help people that are not good at saving money and keeping money available for paying their mortgage when it is due. If people are able to pay the money as soon as they get their checks, then they cannot spend it on other things and put themselves in a bind at the end of the month.
As far as whether it is better to make bi-weekly payments or just add an extra fifty dollars to principal every month, i think someone has a misconception too. Making bi-weekly payments doesn't cost anymore money per month than making monthly payments unless the banking institution charges a fee for doing that, which none should, but sadly some do. The money you pay towards your mortgage in these two circumstances per month is the same. So you could still pay an extra $50 per month towards your principal and be working towards paying off your mortgage even sooner yet.
Doing any of these types of things doesn't seem like much because it could only make a few dollars difference on your principal balance per month, but over 360 billing cycles, it pays off big time! You just have to be sure and sit down with whatever banking institution manages your mortgage and talk to them about what the contract that you signed when you got your mortgage will allow and will not allow, and what will result in you having to pay extra fees and what will not result in extra fees before you go diving into something that you are not sure about.
at the risk of being called names again, i will elaborate. we call extend ourselves when we agree to a mortgage. if we could afford 13 payments, why not 14, 15, why not a 15 year mortgage? we pretty much the most we can afford. That is why i am opposed to agreeing in writing to pay a 13th month. althogh i am 4 years into my current mortgage and have fortunatly been able to make the extra payments of principla voluntarily. assuming were all working class people here, were all one closed business away from the unemployment line. or in the case of gov workers, one furlough away. I again re iterate, there is nothing to be gained by committing to do what you can just as easily do voluntarily. No the banks are not our friends, and the banks make billions in late fees!!
The Banks are our friends, they have only our best interests at heart
Still forclosing on active servicemen, gouging the poor with nickel & dime fees
and charging loan shark interest rates, and we have a Socialist Government ???
Life isn't so lonely. If any of you losers click on any of this f***ing links, you deserve what you get
What this article fails to mention is that you're paying 13 times, which is essentially one extra interest payment to the bank too. That is why they want you to do it.
If you pay your normal 12 and simply drop them another check for the same amount with "apply all to principle" you will do the same thing and cut the interest you pay them too.
The problem with this advice is that uncle Sam credits you interest in the form of a tax deduction. It actually may benefit you more to rob uncle sam of the tax money you'd otherwise give him and hand it to the bank.
So convoluted is our system that any kind of advice like this is crap. There is no cut and dry answer. It takes a lot of brain power, time and an excel spreadsheet/college degree to figure it all out.
Banks typically adjust your biweekly payment from the end of your principal once a month even if your third party bi weekly company sends your bank payment every two weeks. That is still better than nothing as long as you can trust the third party. If you are lucky, you may find a lender with a true biweekly loan which will reamortize your loan after every biweekly payment reducing interest costs and increasing principal reduction even further (without recurring fees). I have one such mortgage which began 9 years ago with a balance of $252,000. The balance today is $180,000. But don't just go out and refinance...remember the banker's secret is the front end interest in the early years of your 30 year loan. Sure they will refi you all day long on a 30 year loan to get those next 5-10 year nearly all interest payments. Don't fall for that. Interest rate is not the end all. Your net effective interest rate (from paying a little bit extra each month) is typically more important and money saving. Just saying.