Advice on How to Save with a Bi-Monthly Mortgage

UpdatedSep 13, 2007

What are the pros/cons of a bi-monthly Mortgage?

I understand the pros/cons of a biweekly plan and understand I could do it on my own. My question is, is there a biweekly company that would apply my extra payments on each monthly payment (I will be putting in an extra $200 per payment every 2 weeks) instead of holding this $200 each payment for 6 months until the semiannual addtional payment is made. I want the extra payments applied monthly instead of semiannually. Does such a plan exist?

To my understanding, there is really no such thing as a "bi-weekly mortgage," meaning a mortgage that actually calculates your interest and payments on a bi-weekly basis. Rather, the bi-weekly mortgage companies that promote this type of mortgage repayment plan are actually intermediaries between you and your mortgage company. Rather than making a single payment to your mortgage company each month, these companies allow you to split your mortgage payment, making a half payment every two weeks, while the company holds your funds and makes a regular mortgage payment every month.

Since paying every two weeks means that you are paying more money annually than if you paid once every month (and with the effect of compounding, it rapidly cuts down the principal and consequently the interest and total cost of the mortgage loan), you should build enough money to make one additional mortgage payment per year. Many times, a bi-weekly mortgage payment holds your additional funds throughout the year until it has enough money to make an additional half or full payment to your mortgage company. Generally, these additional payments are paid to your mortgage lender either once annually or once every six months.

As you seem to realize, the fact that these companies hold your additional payments for at least six months means you are not actually paying down your mortgage every two weeks, so the benefit of these programs are much less than if the additional funds were paid to your mortgage company every month.

To my knowledge, there are no bi-weekly mortgage companies that pay the additional funds to the lender on a monthly basis. However, your lender may allow you to pay more than your regular mortgage payment each month, which should benefit you much more than enrolling in a bi-weekly mortgage program. I do know that Wells Fargo has a nice mortgage program where you pay only the interest expense, but then can lump sum in money WHENEVER you want, and your monthly payment re-calculates every month. If you make an additional payment each month, be sure that you mark it as "principal reduction" so that your lender credits your loan properly. You should contact your lender to discuss the impact of paying more than your regular monthly payment, and if your loan includes any pre-payment penalties for paying off your mortgage before the full term of the mortgage has expired. Making an interest reduction payment each month on your own than rather than an annual or bi-annual extra payment, you should pay off your mortgage a few months faster than with a bi-monthly mortgage program.

To learn more about bi-monthly mortgage program, you should visit www.realestateabc.com

I hope this information helps you Find. Learn. Save.

Best,

Bill

Bills.com

7 Comments

BBill, Mar, 2009

Thanks for visiting!

LLinda Yates, Mar, 2009

Thank you so much for this article! I recently refinanced and my loan was sold to another mortgage company immediately following. When I registered for the site to pay my mortgage online I found out that they would charge four dollars for each bi-monthly and bi-weekly transaction and I was not happy, but after reading this article I feel much better. I will just add the extra to my mortgage every month.

LLoanClassroom, Feb, 2009

Your web site is very informative. I will check back periodically to see what you have wrote

MMatt Isleib, Feb, 2009

Very informative and well written article.

hhard money, Dec, 2008

One of the popular ways to save money on mortgages is to use what is known as the biweekly mortgage payment plan. With the biweekly mortgage payment plan, the borrower makes payments on his mortgage every two weeks, instead of once a month. The biweekly payment is one-half of the monthly payment. So, if you converted from a monthly plan to the biweekly plan and you had been paying $2,000 a month for your principal and interest, you would now be paying $1,000 every two weeks.There is no doubt that this will save you money. By using the biweekly mortgage payment plan, you'll pay off your loan much earlier than you would have if you continued to pay monthly. Typically, on a 30-year mortgage, a biweekly plan will pay your mortgage in full, 7 to 10 years earlier than a monthly plan will.A Magical Payment Plan?At first glance, it looks like the biweekly plan is magical. In reality, however, there is nothing magical about a biweekly mortgage payment plan. The reason a borrower is able to pay off his mortgage sooner with a biweekly plan, is because he is, actually, making additional principal payments.In the example above, where a $1,000 payment is made every two weeks, $26,000 is being paid toward the mortgage every year. This is because, quite simply, there are 26 two-week periods in a 52-week year. With the regular $2,000 per month plan, $24,000 is being paid per year.No Magic, Just Trickery!Now, let's run the numbers on this $2,000 a month mortgage and see what happens when we convert to a biweekly payment plan. With a thirty-year mortgage at 7.5 percent interest, our borrowed amount is $286,035. With a borrowed amount of $286,035, at an interest rate of 7.5 percent and a $2,000 a month payment, you would save $114,697 by converting this mortgage to a biweekly payment plan and making payments of $1,000 every 2 weeks. This seems astounding! Doesn't it?Here's what makes it less astounding. Using the same numbers with a monthly plan, except using a monthly payment of $2,166.67 instead of $2,000, the saved amount is $113,682.90. Not a whole lot less astounding than the biweekly plan, is it?Why do we use a monthly payment of $2,166.67 in place of $2,000? As we noted before; when we pay a biweekly mortgage plan, we end up making one extra monthly payment per year. In our example, $2,000 is the amount of the extra yearly payment. $2,000 divided by 12 means we would be paying $166.67 extra monthly after we converted to a biweekly plan. Paying $166.67 extra each month, at 7.5% with a total borrowed amount of $286,035.25, ends up saving us almost as much with the monthly plan as we would save with the biweekly plan!The only reason we save a little more with the biweekly plan is you would be paying $1,000 toward principal 2 weeks sooner. If you would like, you could make your first extra principal payment, $166.67 at the beginning of the month and you would save just as much as the biweekly payment plan saves you.The Astounding PartHere's what's astounding to me! When you convert to a biweekly plan, leading lending institutions charge you between $375 and $1,300 and some lesser-known biweekly conversion companies charge you a monthly fee that can amount to more than $10,000! As you've just seen, you don't need to pay these excessive fees because you can get the same effect of a biweekly mortgage plan by simply keeping the mortgage you have and paying a little extra principal each month. Certainly, you can institute this plan without paying any upfront fees!Also worth noting is; when you commit to a biweekly plan and the extra money becomes too much for you to pay some month, you'll get hit with a late charge for not paying on time. If you institute your own plan, maybe you'll be a little short and not able to pay the extra amount some month, but it won't cost you a $35 to $100 late charge.It's Just a ScamWhen you study the history of biweekly mortgages, you'll see it impressed people when they didn't realize they were actually making larger payments on a yearly basis. Thinking they were making the same payment each month, but just paying half of it sooner, made them think paying $1,000 to convert to this plan was a bargain.Now that the word is out that there is absolutely no advantage to making payments with a biweekly plan instead of just paying a little more toward principal each month, the biweekly plan should soon die and be buried along with all the other great scams of our time!

sscott, Oct, 2011

I saw the extra payments right away but still no one addresses whether paying your loan (or setting it up at the beginning(do banks do this)) twice monthly will save you money just on the merits of receiving some of the money two-ish weeks early. And another question is can you direct principle payments to the front of the loan and would this save you more than paying principle that gets directed to the end of the loan. I pay 1oo extra every month for the last ten years but my sister insisted that she was taught to tell the banks to apply this money to the front of the loan and this somehow saves you more in interest. ( I suspect that if your principle part of the loan at the beginning is smaller there for paying off principle at the beginning would eliminate a larger amount of the early higher interest rate)Scott

BBill, Oct, 2011

Extra Payments: As previously explained, by making bi-monthly payments you save money because you are paying an extra month's payment each year. If you were to split your regular monthly payment into two equal payments during the month (therefore not adding the total amount paid over the year) then your interest savings would be extremely small. I created an amortization table comparing identical $100,000, 5%, 30-year loans — one with 360 monthly payments and another with 720 payments that were half of the 360-month amount. Assuming the loan servicer would accept two payments per month, a borrower would save $201 on interest charges over the life of the loan.

Accelerated Payments: Any early payment that you make beyond your regular payment will be applied to the principal and lessen the overall interest costs. The nominal amount you save per payment will always be determined by the amount paid in and not the time you make the payment. However the earlier you make the accelerated payment the more payments you will have to benefit from the reduced balance. Additionally, the more accelerated payments you make, the more you also increase your overall benefits.

If your goal is to pay off the loan early, you have made a wise choice by making extra payments each month. If you wish to save money and reduce your overall costs then you should also be evaluating refinancing your loan by checking available interest rates versus your current rate.