DEFINITION of Bi-Monthly Mortgage
A bi-monthly mortgage 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. This is the equivalent of 12 monthly payments for a bi-monthly plan and 13 monthly payments under a bi-monthly plan.
BREAKING DOWN Bi-Monthly Mortgage
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 a full monthly payment is made).
How Bi-Monthly Mortgages Are Structured
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.
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 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. 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.