What is a Bi-weekly Mortgage
A bi-weekly mortgage is a mortgage product which allows the borrower to make payments every two weeks rather than once a month. This option can provide significant savings in interest over the life of the loan if the mortgage company passes the payments directly to the lender.
BREAKING DOWN Bi-weekly Mortgage
A bi-weekly mortgage allows the borrower to make the equivalent of one extra month’s mortgage payment over the course of a year. Paying half of the month’s bill early can lead to a significant savings in interest of the life a loan if the mortgage company passes the payments promptly to the lender. Some mortgage companies will hold on to the first payment of each month and wait until they receive the second payment before sending both payments to the lender, thus negating the advantage of a bi-weekly mortgage arrangement.
A bi-weekly mortgage is not the same thing as a bi-monthly mortgage. The bi-monthly structure requires two payments per month, which comes out to 24 payments per year. Since a bi-weekly payment plan does not adhere strictly to a monthly calendar, it involves 26 payments per year. Two extra payments equals roughly one month’s extra payment over a 12-month period; more payments per year means the borrower will pay it off sooner and pay less interest. To make up for this lost interest, some lenders will charge a fee for a bi-weekly mortgage.
Create Your Own Bi-Weekly Mortgage
A disciplined borrower looking to enjoy the benefits of a bi-weekly mortgage without the added fees can structure their own payments to mimic the plan. The borrower can make payments every two weeks, and, if the mortgage company applies the payments immediately, the borrower gets the interest savings. The borrower can also divide their monthly mortgage payment by 12, and set that amount aside each month for a year. At the end of the year, they can take those savings and make an extra payment to further reap the benefits of the bi-weekly mortgage.
Under a traditional mortgage, each monthly payment is composed of some interest and some principal. Early in the loan, payments are largely interest but the portion that is principal grows over the life of the loan. All along, interest calculations are based on the assumption of 12 monthly payments per year. When a borrower sends in an additional 13th payment, most lenders will devote the entire payment to principal, hastening the payoff horizon of the loan.