August 31st, 2016 | Bi-Weekly Mortgages
As we continue to look at the pluses and minuses of Bi-Weekly Mortgages, let's look at how it lays out in payments
over an annual basis to determine if you achieve the optimum results you want!.
A bi-weekly mortgage payment program is meant to short-circuit your loan's amortization schedule.
Instead of taking 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year.
Except that you can't make 13 payments per year on your mortgage -- that's not how a mortgage works.
With a mortgage, you pay a certain amount of interest on an annual basis and that amount is covered in your first twelve payments.
The 13th payment has to go somewhere, though, so it gets applied to your principal balance; the amount that you still owe to the
And, this is how a bi-weekly payment plan works. With each "13th payment", your loan balance is reduced by the entire amount of the payment. You reach your loan's payoff date sooner.
At today's mortgage rates, bi-weekly payments shorten your loan term by 4 years.
Click to see today's rates (Aug 30th, 2016)
Should You Use A Bi-Weekly Mortgage Program?
Bi-weekly payments plans work; there's no doubt about that. It's basic math. However, there are several reasons why homeowners
may want to avoid enrolling in a bi-weekly mortgage payment plan.
The first -- and most obvious -- 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, in other words, 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.
Assuming a $300,000 mortgage at 4.000%, 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.
This may be enough "math" for you to believe it's better to send extra principal with your payment as opposed to doing a bi-weekly
Part 3 let's you know just how much you can plan on savings and come closest to your goals!