Mortgage Land Prosperity

In a bi-weekly mortgage, one half of a monthly payment is paid every two weeks. That means that in a year with 52 weeks, 26 bi-weekly installments are made. If each of those installments is one half of a monthly payment, 13 monthly payments have been made in 12 months, with that extra month being applied directly toward the principal.

That is to say that, in just 12 years of paying on a loan, a homeowner will have made a year’s worth of extra payments, all being deducted from the principle amount.

For homebuyers who can afford it, this option allows them to own their home outright much sooner and pay less in interest over the term of the loan.

Existing mortgage holders must pay a fee to switch from a monthly plan to a biweekly, but the same effect can be easily achieved (as long as your lender does not charge a prepayment penalty) simply by putting half of your monthly payment, every two weeks—most likely payday—into a special bank account from which you pay your mortgage. Then, each month, when you make your monthly payment, pay out the balance of that account.

As an example, a standard 30-year mortgage fixed at 6% on $125,000 (excluding PMI and property tax), taken out on January 1st of 2010, will yield monthly payments of $749. In twelve years, at the end of the year 2022, $95,701 will still be owed on the principal.

The same loan agreement with a bi-weekly payment option will yield an additional $8,988 by that same year ($749/year x 12 years). All of this being applied to the principal amount, the owner of this mortgage now owes $86,713 on the principal. Since the monthly payment is static, for that principal amount, the owner pays a monthly interest-to-principal ratio equivalent to that they would pay during year 14 of the loan. This means paying down the principal quicker.

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