If you could pay off your mortgage several years earlier, saving thousands in added interest costs, would you? Of course you would, and there’s a simple way to do that: it’s called a bi-weekly mortgage.
A bi-weekly mortgage is exactly how it sounds: instead of paying monthly, you pay in half-payments every other week. That may sound like it makes no difference in how much you pay yearly, until you realize there are more than four weeks in a month. Two half-payments per month isn’t the same as a half-payment every other week.
Understanding the Math
Because there are 12 full payments per year on a monthly mortgage, doubling that would mean 24 half-payments total. But there are 52 weeks in a year, so paying every other week would total 26 half-payments. And remember that lenders add interest on a per-diem basis. So on a monthly system, lenders are collecting an extra two weeks of interest per year. They’re using you to make a profit!
Paying bi-weekly eliminates the extra charge, despite the extra payments. For a standard 30-year loan, assuming you pay bi-weekly as soon as repayment begins, you could shave 20%-30% off the total cost of interest, and between four and eight years off the life of the loan. It’s like writing a check addressed to your future self!
THE GENEROUS BOSS
Imagine your boss offered to either pay you $1,000 per week, or $500 every three days. Choosing the latter would give you money sooner, and there would be a few weeks in the year when you would be paid three times (on Sunday, Wednesday, and Saturday). While it’s only a little extra per week, it’s the difference between 52 payments and 122 payments, totaling $52,000 and about $61,000 per year, respectively. With both this example, and with a bi-weekly mortgage, more means more for you!
Don’t fall for the bank’s tricks!
There are only two reasons why someone wouldn’t want to enroll in a bi-weekly program:
- There are too many potential fees involved
- They feel like they are losing money
Let’s address #1 first. Certain banks don’t want to lose out on the extra money, and they charge hundreds of dollars to enroll in a bi-weekly repayment plan. Other banks are more concerned with customer satisfaction, and will let you enroll for free. Because the potential fees could offset much of the savings, the total amount saved depends upon how much time is left in the loan. Enrolling for free is the smart option; call your bank and ask if you can!
To address #2, while it is true you are paying a little more per year, don’t be fooled. With any repayment program, the lender wants you to pay the minimum, because it means more in interest for them later. Don’t fall for it! The more you pay now, the more you save!
In a mortgage payment, you are not paying the bank; you are paying your future self. You are building equity in your home, and you will see all that money return to you when you sell it. The more you can save on interest, the larger a return you will get. And the sooner you enter into a bi-weekly program, the more potential you have to save!
Talk to your lender and start saving today!