Is the Bi-Weekly Mortgage a Good Deal?

Author: Bob Sherman

Perhaps you've read the bi-weekly mortgage ads that claim you're paying too much in mortgage interest. They say you can save $60,000 in interest and pay off your mortgage years ahead of schedule.

How can you realize such huge savings? And, how can you eliminate your mortgage debt so quickly? The bi-weekly mortgage is an answer. Thousands of people every month search the Internet for information about a bi-weekly mortgage. And, any bi-weekly mortgage calculator will show you that you really can save a lot of money.

So, exactly what is a bi-weekly mortgage and what are your options for getting those tremendous results?

A bi-weekly mortgage simply involves making half your mortgage payment every two weeks. Since there are 52 weeks in a year, you will be making 26 payments. Since each payment is half your current monthly mortgage payment, you'll essentially be paying the equivalent of 13 monthly mortgage payments.

=== How to Save Interest and Reduce the Length of Your Loan ===

You can save interest and reduce the length of your mortgage loan by adding extra money to your mortgage payments.

Let's say you have a $150,000 mortgage for 30 years at 6.34%. Your principal and interest payments are $932.37 per month.

Your first payment of $932.37 covers $792.50 in interest. $139.87 is applied to the principal to help reduce your mortgage debt.

The net result of paying $932.37 is to reduce your debt by $139.87. From your viewpoint, that is what your first payment accomplishes.

Your second payment does slightly better. It reduces your debt by $140.61. But, at the same time, you pay $791.76 for interest.

But, what if you added another $140.61 to your first payment? That extra $140.61 would go directly to reducing your mortgage debt. Your first payment would then reduce your debt by $139.87 + $140.61 (or $280.48). It would have accomplished what your first two payments would have done.

Essentially you could erase the second payment from your mortgage schedule and move all the other payments up. Now instead of 360 monthly payments, you would only need to make 359 payments. And you would have saved paying $791.76 in interest.

This illustrates the benefits of adding extra money to your mortgage payments.

=== Bi-Weekly Mortgage Does a Similar Thing ===

A bi-weekly mortgage does the same thing. Because you're essentially paying 13 mortgage payments a year, that extra money is directly reducing your mortgage debt and decreasing the length of your loan. At the same time, it's reducing the total amount of interest you will pay.

A bi-weekly mortgage service withdraws half your mortgage payment from your bank account every two weeks. When the mortgage is due, the bi-weekly mortgage service pays the amount it has withdrawn from your account to your mortgage company.

Twice a year three withdrawals are made in a month. In those months, that extra money is added to your normal payment. This reduces your debt, decreases the length of your mortgage, saves interest and builds equity faster.

=== How Much Better is the Bi-Weekly Mortgage? ===

This depends on your total mortgage payment. The amount of your monthly mortgage payment, usually called the ""PITI payment"", comprises payments for Principal, Interest, Taxes, and Insurance. Your mortgage company actually pays your homeowner's insurance and taxes. For the same mortgage amount, the total PITI payment varies from home to home.

Let's say your annual real estate taxes are $2,000 and insurance is another $800. You'll need to add one twelfth of the sum of your taxes and insurance to your mortgage payment. One twelfth of $2,800 is $233.33. Adding this to the principal and interest payment of $932.37, we'll get a total monthly PITI payment of $1,165.70.

Using a bi-weekly mortgage right from the start, you will pay it off in just over 24 years. You'll also save just over $49,000 in interest. So, the advantage of paying more than the minimum payments is huge. (Note that some online bi-weekly mortgage calculators do not take into account the entire PITI payment. Their results will differ from those presented here.)

=== Is a Bi-Weekly Mortgage Right for Me? ===

You can regularly add extra money to any of your mortgage payments. A bi-weekly mortgage service is just a convenient way of accomplishing this.

Now, the bi-weekly mortgage service is typically a middleman in the payment of your money to the mortgage company. It typically charges you a set-up fee (perhaps $200) and a bi-weekly withdrawal fee (about $4). This is extra money you are paying for the convenience of automatically making more than the minimum mortgage payment.

If you lack the self-discipline to write out checks for more than the minimum payments, a bi-weekly mortgage service can help you achieve the promised savings.

If you can exercise self-discipline, are dedicated to reducing your debt and believe you can make more than the minimum payments on your mortgage, then you can eliminate the middleman. You can simply add extra money to your mortgage payments and reap the benefits yourself. And, you'll save the setup and bi-weekly withdrawal fees.

Either way, you will be reducing the length of your mortgage, decreasing the amount of interest you're paying, and increasing your home equity faster than making the minimum payments.

About the author: Bob Sherman is the owner of http://www.bobshermancredit.com/ a site dedicated to helping you reduce your debt and build wealth. He offers a free ebook, ""How to Free Yourself from Credit Card Debt"", available on his website.