June 29, 2018
June 29, 2018
If you’re looking for a way to both save interest on your mortgage and pay it off in less time, you should give serious consideration to a bi-weekly mortgage. You can accomplish both goals without stretching your budget too tightly.
Under a typical mortgage payment arrangement, you make monthly payments until the loan is paid in full.
Using a bi-weekly mortgage, that monthly payment is cut in half, and you make your payments every two weeks instead of monthly. It also means that you will make 26 payments each year, rather than 12 as would be the case with a standard monthly payment schedule.
Mathematically, this means that you will be making the equivalent of 13 monthly payments each year. The extra monthly payment will reduce the term of the mortgage by several years, and save you many thousands of dollars in interest expense over the life of the loan.
The interest savings can best be demonstrated by providing an example.
Let’s say that you have a $200,000 mortgage for 30 years at 4% per year.
If you take a standard monthly payment arrangement, your payment will be $954.83 per month, which you will pay 12 times per year. The payment will include an average interest charge of $399.28. Over the life of the loan, the total interest that you will pay will be $143,739.01.
If instead, you take a bi-weekly mortgage payment arrangement, the payment will be $477.42 every two weeks. You will make that payment 26 times per year. The payment will include an average interest charge of $153.91 per payment, and will total $120,360.32 over the life of the loan.
The bi-weekly payment arrangement will result in a savings of $23,378.69 over the life of the loan.
But that’s not the only good news.
Since you will be making the equivalent of one extra mortgage payment each year using a bi-weekly mortgage, your loan will be paid off in less time. On average, a 30-year mortgage loan can be paid off in less than 25 years using a bi-weekly payment format.
This can make a bi-weekly mortgage an excellent passive strategy to pay off your mortgage early. That will give you an extra 5+ years without a mortgage to prepare for retirement, eliminate non-housing debt, or help to fund your children’s college educations.
Even though you’ll be making the equivalent of one extra monthly payment per year using a bi-weekly mortgage, it can still be easier on your cash flow than a traditional monthly payment arrangement.
A single monthly payment can be a major cash flow drain. It is typically the largest expense in the average household budget. It’s likely that most households must work their budgets around that payment. For example, they may need to dedicate one paycheck to the mortgage each month, while using other paychecks to cover other expenses.
But since the bi-weekly mortgage cuts that monthly payment in half, it will usually be easier to work into your budget. You will be able to make your house payment, and still have money available for general living expenses and to pay other bills.
A bi-weekly mortgage can also work better with your pay cycle. For example, if you are paid on a biweekly basis – which is probably the most common a pay cycle – you will be able to match up paychecks with mortgage payments in a precise way. In reality, very few people are paid on a monthly basis, which means that a monthly house payment can be disruptive to the household budget.
Bi-weekly mortgages aren’t for everyone, but they can work incredibly well if you’re looking to pay off your mortgage early and reduce your interest expense, in a way is relatively easy on your budget. Check out how a bi-weekly mortgage can work for you the next time you apply for a home loan.