Simple Interest Bi-Weekly Mortgage

What Is a Simple Interest Bi-Weekly Mortgage?

A simple interest bi-weekly mortgage is a mortgage payment plan in which the lender applies the borrower's payments immediately toward the remaining principal balance of the mortgage.

This differs from a traditional bi-weekly plan, in which the servicer of the mortgage holds the first payment received during a month until the second payment for that month is received. After the second monthly payment is received, then the sum of the two payments is applied toward the remaining principal balance of the mortgage.

Key Takeaways

  • A simple interest bi-weekly mortgage is a mortgage payment plan in which the lender applies the borrower's payments immediately toward the remaining principal balance of the mortgage.
  • A simple interest bi-weekly mortgage differs from a traditional bi-weekly plan, in which the servicer of the mortgage holds the first payment received during a month until the second payment for that month is received.
  • A simple interest bi-weekly mortgage payment plan can enable homeowners to pay off their mortgage more quickly than under a monthly payment plan or a traditional bi-weekly plan.

Simple Interest Bi-Weekly Mortgage vs. Traditional Bi-Weekly Mortgage

A simple interest bi-weekly mortgage plan creates greater interest savings than a traditional or standard bi-weekly plan. With the latter, two payments must first be received before any amount is applied toward the remaining principal balance of the mortgage.

Under a simple interest bi-weekly plan, however, when the first payment is immediately applied toward the principal balance, interest is no longer charged on that part of the principal balance as it would have been had the payment been held until the second payment in the month arrives.

It's important for borrowers to be mindful when they are enrolling in a bi-weekly payment plan; borrowers should understand the terms of their loan. Some lenders offer a bi-monthly payment plan, which is effectively the same as a standard bi-weekly plan, in that it lacks the long-term advantages of the bi-weekly simple interest option.

Some third-party intermediaries will also offer to set up a bi-weekly payment plan on a borrower’s behalf. These third-parties will typically debit your account every two weeks, but they will hold the funds until they may one payment at the end of the month. They may also charge a fee for the service.

Example of a Simple Interest Bi-Weekly Mortgage

A simple interest bi-weekly mortgage payment plan can enable homeowners to pay off their mortgage more quickly than under a monthly payment plan—or a traditional bi-weekly plan.

For example, consider a $200,000 loan with a 4.5% interest rate. Under a standard monthly payment plan, the homeowner would pay $1,013.37 per month. When the loan is paid off, in 30 years, the homeowner will have paid an additional $164,813.42 in interest payments.

However, if the homeowners had a simple interest bi-weekly mortgage payment plan, they would instead pay $506.69 every two weeks. The loan would be paid off after 26 years, instead of 30 years, and the homeowners would have paid a total of $135,773.67 in interest.

Using a mortgage calculator is a good resource to understand these costs.

In other words, the simple interest bi-weekly payment plan would save the homeowner more than $29,000, and it would help them pay off their mortgage four years earlier than with a standard monthly plan.