Bi-weekly Mortgage Payment Calculator
Use this free calculator to discover how much time and money you will save.
After all the other decisions you've made about buying a new home - finding the right house in the right neighborhood, the right lender and the right rate - you still have one more financial choice to make.
Should you opt for bi-weekly payments, or stick to the traditional schedule?
The answer to that important question lies in your personal lifestyle and your ability to manage money.
Let's use a hypothetical borrower named Mr. Green, whose monthly outlay is $2162 for 30 years on a $325,000 debt. Put yourself in Mr. Green's shoes as we walk through the advantages and disadvantages of the bi-weekly approach.
How Do Bi-Weekly Payments Work?
Were you under the impression that there are exactly twice as many bi-weekly periods as monthly? Most people believe that, but let's look a little closer.
There are 12 months in a year, so there are 12 monthly outlays per year. But there are 52 weeks in a year, equaling 26 bi-weekly periods per year. By sending in money every two weeks instead of once month, you have magically created two additional bi-weekly outlays.
If you were to simply make two contributions a month, that would be just 24 a year, so actually this method has you making two extra contributions each year, which is the same as making an additional monthly contribution.
If you apply this additional amount toward the principal, you're ahead of the game. In a way, bi-weekly plans are a way of tricking yourself into extinguishing your debt faster, about 6 years sooner in most cases.
In Mr. Green's case, financing costs $2,162 each month and amounts to a yearly outlay of $25,946. But 26 bi-weekly installments of half the monthly amount adds up to (26 x $1,081)= $28,106.
Again, that extra $2,100 a year reduces the principal, allowing him to spend less on interest and to pay off his debt more quickly. For Mr. Green that spells a savings of $112,000 over the course of the loan, and it allows his home to be paid off 6 years and 4 months earlier.
Do Bi-Weekly Contributions Save You Money?
Yes and no.
Obviously, in the long run Mr. Green saves about 25% in interest, while reducing the same principal at a faster pace. However, the option of bi-weekly contributions comes with its own price tag. You didn't think saving all that interest money was free, did you?
Most lenders offer you the option of either an upfront fee, or paying as you go.
The top mortgage-servicing institutions in the country charge an average of $350 in enrollment fees and a small percentage of each transaction. In order to pay as you go, there are no up-front charges, but lenders levy a monthly service charge ranging from $4 to $9.
If that service charge seems like no big deal to you, remember that a 30-year note consists of 360 such charges.
So yes, in the long run a bi-weekly schedule will definitely save you some money, depending on the interest rate and the size of the loan. The more expensive your home, and the higher your interest rate, the more you'll save by contributing every two weeks.
Are Bi-Weekly Outlays A Good Option For You?
The only person who knows is you. You know your family's spending and savings habits, and your personal strengths and weaknesses. Are you disciplined financially, or do you just "wing it" and hope it all works out? If you're in the latter group, a bi-weekly schedule is a good way of forcing yourself to be more responsible.
You're also a good candidate if you like the feeling of working down your debt as quickly as possible, and especially if you get a paycheck every two weeks.
Have you noticed that the genius of the bi-weekly plan is that it shadows your paycheck like a hawk? Since most Americans receive their salary checks every two weeks, lenders will schedule your automatic withdrawl to be taken from your bank account the day after you receive your paycheck.
If you like the idea of extinguishing your mortgage faster with less interest cost, or if you lack discipline in money matters and you don't mind paying the extra fees, by all means discuss your bi-weekly options with a professional financier.
What Are The Pros And Cons?
- They're easy and automatic
- They coincide with bi-weekly paychecks
- They save you about a quarter of your interest fees
- They allow you to repay in full 5 or 6 years sooner
- They make you more fiscally responsible
- They cost you extra money in sign-up and transaction fees
- They're not worth it unless you plan to stay in your house for decades
- They won't fit your retirement plans for monthly income checks
- They may eat up funds that could be better invested elsewhere
You have to weigh the lofty feeling of paying off your dream home early against the reality that doing so may seriously cramp your style in other areas, or keep you from realizing other dreams you and your family may have.
What To Watch Out For - Buyer Beware
First of all, steer clear of rip-off artists who charge you exorbitant fees for making additional payments - you're smarter than that.
Next, make sure your loan has no prepayment penalty. Most do not nowadays, but if your lender penalizes you for early repayment, it defeats the whole purpose of biweekly payments.
Finally, you should realize that it may all be window dressing; some loan-servicing professionals may still make your payment once a month, they just like to collect it from you in two-week increments. That's just wrong.