We’ve all heard the conventional wisdom – by paying your mortgage bi-weekly you will save interest on your mortgage and pay it off sooner. This article does not dispute that fact. However, by examining the mechanics of bi-weekly mortgage payments you will see that there are much better options that will achieve the same results.
What a Bi-Weekly Mortgage Payment Is
Usually a mortgage payment is made once per month, 12 times per year. A Bi-Weekly Mortgage payment instead puts your payment on a schedule to pay 1/2 of your mortgage payment every 2 weeks. Since there are 52 weeks in a year, that would result in 26 Bi-Weekly Payments which equates to 13 full regular payments. Paying extra on your mortgage will save you interest over the life of the loan, and this is one way to accomplish that. But what is really happening with a Bi-Weekly mortgage payment? Let’s explore.
The Mechanics of a Bi-Weekly Mortgage Payment
You may have received an advertisement in the mail from a company offering to convert your normal mortgage payment to a Bi-Weekly payment. They would act as a middle man to forward your payments on to your servicer, or your mortgage company may offer to convert you to a bi-weekly mortgage payment – usually for a fee. They normally require an automatic withdrawal from your account every two weeks. When those payments are made, they are almost always sit and are not directly applied to your payment until a full month’s payment is made.
In other words, every two weeks you are sending an interest free loan to the lender – and paying a fee to do it!
A Better Way
The simplest way to ensure that you get the benefit of an extra payment is to send 1/12th extra every month with your mortgage payment to be applied to principal. However, if you like the idea of having a withdrawal every 2 weeks that corresponds with your paychecks (the main selling point with a bi-weekly mortgage payment) you can set up your own way to save up for that extra month’s payment, not pay any fee to a service and receive interest while doing it!
Here’s how: Set up an interest-earning Savings or Money Market account to be used to pay your mortgage. Every two weeks, setup an automatic withdrawal from your Checking account for 1/2 of your mortgage payment to be deposited into your Savings Account. Pay your mortgage as normal, once a month from this Savings account. Every 6 – 12 months when your extra paycheck hits the savings account, apply that towards an extra mortgage payment and you will see that you receive almost identical interest savings without setting up a bi-weekly plan, paying any fees or giving your lender free access to your money.
Bi-weekly mortgage payments have gained popularity because they offer an automated way for borrowers to pay extra towards their mortgage without “feeling it” in their pocket books. However, by setting up your own automated method, you can achieve the same results without giving your lender more money.