Bi-weekly mortgage is an option by which a borrower can reduce the total interest paid for their home loan. In this kind of payment plan, the borrower makes half the payment after every two weeks instead of a single monthly payment.
The bi-weekly payment plan is such that a person makes twenty-six half payments or a total of thirteen full payments every year, i.e. one extra payment compared to the monthly payment plan. The extra payment helps in reducing the principal balance which is the basis for calculation of future interest payments.
As the principal in this kind of payment scheme gets reduced, the total interest to be paid and the term of the loan are also lowered. Moreover, as the loan will be paid off earlier than its entire period of repayment, one can stop paying for the private mortgage insurance much earlier than it would have been under a usual monthly payment plan.
Let us take an example to demonstrate how the payments are made under a bi-weekly mortgage payment plan. Let’s consider a mortgage with principal of $150,000 having loan total term of 360 months and a rate of 6 percent. Under the monthly payment plan, the borrower has to pay the principal and interest payment of $899.33 per month and an overall interest payment of $173,757 over the life of the loan.
When we compare the above figures with the payments required in a bi-weekly plan, it comes to $449.67 as the payment made after every two weeks. The total interest that due over the entire loan term would be $135,294 and the loan could be paid off in 24 years. Thus, the borrower can save interest payments for about six years if he can follow the bi-weekly plan.
Prior to choosing the bi-weekly plan, there are a few things to be considered.
- Analyze your financial position and find out if you can afford to continue with extra payments every month.
- Check out if the lender charges huge fees for allowing a bi-weekly payment plan.
- Verify if the lender credits each of the bi-weekly payments upon receipt to the deduction from the principal. In case the lender waits for the second payment before crediting your loan account, then you will not be getting the desired benefits.
- Check your mortgage documents to see if there is any pre-payment penalty.
- At the end of each year, you should check your loan balance to make sure that the bi-weekly payments get properly credited towards reduction of your loan balance.
To sum up, it can be said that the borrower has to be disciplined enough to make payments twice a month. He should plan accordingly so that he is able to gain from the amount he saves in the total interest payment by early repayment of the mortgage.
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