What is a Bi-Monthly Mortgage?
A bi-monthly mortgage payment is a mortgage plan where half the scheduled monthly payment is made twice a month. This plan is not to be confused with a bi-weekly plan where half the scheduled monthly payment is made every two weeks.
The difference between a bi-monthly and bi-weekly plan is subtle—a bi-weekly plan results in two more payments being made annually than on a bi-monthly plan. In other words, under a bi-monthly plan 24 payments are made annually, while under a bi-weekly plan 26 payments are made annually.
Sometimes spelled as 'bi-monthly' mortgage payments, these plans are typically set up for the customer to pay on the 1st and the 15th of each month. Under some bi-monthly plans it is even possible to make extra payments on top of the bi-monthly ones.
How a Bi-Monthly Mortgage Works
A bi-monthly mortgage plan will result in interest savings over the life of the mortgage. It does this by reducing the principal of the mortgage as each payment is received as opposed to the first payment of the month being held by the lender until the second payment of the month is received (at which point the full monthly payment is made).
- Bi-monthly mortgage payments can help homeowners pay less interest on their home loans.
- Bi-monthly mortgage payments are subtlety different than bi-weekly mortgage payments.
- Not all mortgage lenders will allow customers to make bi-monthly payments. It depends on the lender.
Under a bi-monthly mortgage, breaking up the payments can cut down the interest that would have to be paid. However, the lender may or may not make such a payment option available. Furthermore, a lender might require additional fees to participate in a bi-monthly mortgage plan, which could eliminate any potential savings that might have been gained.
Bi-monthly mortgage payments may help raise equity in your home at a faster rate than a monthly payment.
A bi-monthly plan might shorten the overall term of the mortgage to a certain degree if it is put into action. Some bi-monthly mortgages might come with a higher payment to further reduce the interest and principal balance compared with making regular monthly payments. It may be possible to convert to a bi-monthly mortgage when refinancing under a new mortgage, which might be down to accelerate the payment process.
With some bi-monthly mortgages, the lender might still hold the first payment, which would eliminate any savings that might have been gained. Such a plan would, however, give the borrower more flexibility in how they pay off a mortgage, but would not result in any fiscal benefit. The terms of any bi-monthly mortgage should define when and how the payments will be applied towards the principal balance.
There is debate over how effective bi-monthly mortgage plans can be, especially because most mortgage lenders calculate interest as a monthly cost, not a bimonthly cost. So, while it is possible to reduce overall interest that is due, the end result might only amount to the elimination of one or a few payments.