Understanding bi-weekly mortgages

What is a bi-weekly mortgage and how can it save me time and money off the life of my loan?

 

When borrowing money to purchase or refinance a home, most people make regular monthly payments on their loan. Those payments cover a portion of the principal or amount of money borrowed and interest (what the lender charges you for the money borrowed) on that loan but many borrowers don’t realize that they can save money on interest and pay off their loan faster by simply making bi-weekly payments, rather than just monthly payments.

 

Understanding interest payments vs. principal payments
To understand the advantages of a bi-weekly mortgage, you first need to understand you’re your mortgage payments are being applied – to the interest or principal on the loan. Depending on your mortgage type, your monthly payments are usually consistent in the amount of your payment. During the first few years of paying your mortgage, the majority of your payments will go toward paying off the interest on your loan and then your payments will start being applyed more and more to your loan’s principal (the amount you actually borrowed for your home). Since the interest is calculated on the principal balance of your loan, the faster your payments can be applied to the principal amount - the more money you will save on your loan and will pay off your mortgage faster.


How a bi-weekly mortgage can put more of your payments to your loan’s principal, instead of interest
Bi-weekly mortgage payments enable you to use the yearly calendar to your benefit by making a payment every two weeks, instead of monthly. Paying off your loan this way, by making 26 yearly payments instead of just 12, your total monthly mortgage expense is the same but by paying every two weeks you are making about one extra payment per year. This extra payment would be applied more to the principal of your loan balance, instead of the interest – reducing years off the life of your loan and saving you thousands on interest payments.

 

Example:
You have a 30-year fixed rate mortgage for $100,000 at a 6.5% interest rate. When paying bi-weekly, you will pay off your mortgage in about 24 years, instead of 30 years, while saving approximately $28,000 paid towards interest over the lifetime of your loan.

So, if your budget allows the extra month's payment per year - a bi-weekly mortgage could be your best option. Even though you’ll be making that extra payment each year, you likely won’t feel a significant financial impact because the payments are spread throughout the whole year, instead of in one lump sum. You can also align your payments with a bi-weekly pay period, making budgeting per pay period easier.

Use our bi-weekly payment calculator to see how much time and money that you could save off the life of your loan and free to reach out to any of our Community Bankers to learn more about our bi-weekly mortgage options.