With a bi-weekly mortgage, the borrower makes payments every two weeks instead of monthly. Making a payment every two weeks enables you to pay down the mortgage faster, which reduces the term of the loan and saves you thousands of dollars in interest expense as compared to a standard monthly payment mortgage.
With a monthly mortgage you are required to make twelve equal payments over the course of a year. With a bi-weekly mortgage you make 26 equal payments over the course of a year (52 weeks in a year / one payment every two weeks = 26 equal payments). Because you are making a payment every two weeks, the required bi-weekly mortgage payment is half the amount of a monthly payment for the same loan amount. For example, if the required monthly mortgage payment is $2,000, then the required bi-weekly payment is $1,000.
A bi-weekly mortgage pays down the principal balance faster than a monthly loan for two reasons. First, true bi-weekly mortgages amortize every two weeks, which means the principal balance is reduced and the required interest payment is calculated every two weeks, instead of once a month. A lower principal balance means a lower required interest payment so if you continue to make the required bi-weekly payment the loan balance reduces more quickly as compared to a mortgage that amortizes monthly.
Additionally, with a bi-weekly mortgage there are 26 payment periods instead of twelve which means the total amount of payments made is greater than the total amount of payments made with a monthly mortgage over the course of a year. In other words, 26 bi-weekly payments equals 13 monthly payments, as compared to twelve required payments for a monthly mortgage. So you effectively make one extra monthly mortgage payment over the course of the year with a bi-weekly mortgage.
For example, if you have a mortgage with a $2,000 required monthly payment, you make $24,000 in total payments over the course of a year ($2,000 * 12 months = $24,000 in total payments). For a bi-weekly mortgage you divide the monthly payment in half, so $2,000 / 2 = $1,000 in this example, but you make 26 payments over the course of a year instead of twelve. Having 26 payments means you make $26,000 in total payments over the course of a year ($1,000 * 26 payments = $26,000 in total payments), as compared to $24,000 in total payments for the monthly mortgage. So the borrower makes an extra monthly payment over the course of the year by paying a little more than the required monthly payment each month. In this case, with a bi-weekly mortgage you pay $2,167 per month ($26,000 / 12 months = $2,167), or $167 more than the $2,000 monthly mortgage payment. All of the extra payment pays down principal on a bi-weekly basis, which means you pay off your loan faster.
Paying down and amortizing the mortgage twice a month instead of once and paying more in total mortgage payments over the course of a year means that a bi-weekly mortgage pays down the loan balance at an accelerated pace. For example, depending on the interest rate, a bi-weekly mortgage generally reduces the length of a loan by five years as compared to a monthly mortgage with a thirty year term.
Eliminating five years from a mortgage can save you tens of thousands of dollars in interest expense
The example below illustrates the benefits of a bi-weekly mortgage. In the example we compare a bi-weekly loan to a 30 year monthly loan. The example uses the same loan amount ($250,000) and interest rate (4.00%) for both mortgages. As demonstrated by the example, the bi-weekly mortgage is four years and three and a half months shorter than the monthly mortgage and saves the borrower approximately $28,500 in total interest expense and $61,490 in mortgage payments over the life of the loan.
Bi-weekly mortgages are most popular in Canada and Australia and are relatively rare in the United States. Almost no U.S. lenders offer a true bi-weekly mortgage. For a true bi-weekly mortgage, the principal balance is reduced and the interest due is re-calculated for each payment every two weeks, not monthly.
U.S. borrowers interested in a true bi-weekly mortgage will likely find it very challenging to find lenders that offer them. The systems that lenders and mortgage servicers (the company that processes your mortgage payment) use are not typically designed to accept bi-weekly payments. Additionally, lenders generate more interest income when you make the required payment over the scheduled term of your mortgage so they are usually not proponents of bi-weekly mortgages.
Some U.S. mortgage lenders, such as Wells Fargo, however, do accept bi-weekly, weekly and bi-monthly (twice a month) mortgage payments that match your paycheck cycle. With this type of program, your mortgage payment is not made until the full monthly payment is received so partial payments, such as bi-weekly payments, do not always reduce your mortgage balance when you make them. With these programs, for borrowers that make bi-weekly or weekly payments, lenders usually apply two-to-four partial payments per year that reduce your principal loan balance so you do benefit from reducing your loan term through mortgage acceleration. These bi-weekly and weekly payment options shorten the length of your loan and save you money on interest expense so they are better financially for borrowers than monthly payment mortgages but not quite as beneficial as true bi-weekly or weekly mortgage programs.
Borrowers who currently have a monthly mortgage can start making bi-weekly payments to reduce their loan terms and interest expense but they may not always receive the full financial benefits of a bi-weekly mortgage. It is important for borrowers to understand that you cannot force your lender to accept bi-weekly payments and the lender may not be legally bound to apply the principal payment when it is received.
For example, if you have a $2,000 monthly mortgage payment due the first of the month and you pay $1,000 two weeks before the payment is due and the remaining $1,000 on the due date (so two bi-weekly payments), the lender may not apply the principal from the first payment when that payment is received. Instead, the lender may hold that initial $1,000 payment and only apply the principal reduction when the payment is due. This is not a true bi-weekly loan because the principal is not reduced and the interest due is not recalculated every 14 days. Making bi-weekly payments on a monthly mortgage still results in overpaying, or accelerating, your loan because you make an extra payment every year. In this case, however, the borrower does not benefit from reducing the principal loan balance every two weeks.
Borrowers interested in changing their monthly mortgage into a bi-weekly mortgage should contact their lender to determine if they can set-up a payment schedule through which their principal balance is reduced on a bi-weekly basis. Although most lenders do not accept bi-weekly payments or apply principal payments prior to the due date some lenders market bi-weekly mortgage programs to current borrowers. In reality, the lender does not set-up a true bi-weekly program and instead applies a single extra payment per year which reduces the your principal loan balance. In this case, the borrower is better off making the extra payment on their own or applying mortgage acceleration, as discussed below. Borrowers should avoid lender bi-weekly mortgage programs that charge fees as they are usually a waste of money.
Unless a lender accepts and applies true bi-weekly mortgage payments, which is uncommon in the U.S., you are better off applying mortgage acceleration, or paying more that your required monthly payment. For example, if your required monthly payment is $2,000, you make a monthly payment of $2,300 instead, or $300 more than the amount due. Mortgage acceleration offers borrowers the same, if not greater, financial benefits as a bi-weekly loan. Accelerating your loan reduces the length of your mortgage and saves you money on total interest expense.
You can accelerate your mortgage on your own by paying more than the required payment every month or by making one or several extra principal payments over the course of the year. Simply add the extra amount to your mortgage payment check, send a separate check or contact your lender directly if you use auto pay. Depending on by how much and for how long you overpay your mortgage, monthly acceleration typically enables you to save more money than a bi-weekly loan. Additionally, you can start and stop acceleration and change your overpayment amount at any point over the course of your mortgage. In this way, mortgage acceleration offers borrowers greater financial flexibility than bi-weekly loan programs offered by lenders or third parties that may contractually require you to continue to make bi-weekly payments. Plus you do not need to pay fees to your lender or a third party to implement mortgage acceleration.
Some companies market bi-weekly mortgage programs that claim to save borrowers thousands of dollars. These companies typically charge borrowers fees for setting up and managing bi-weekly programs, including collecting the payments from the borrower. In many cases these companies do not make true bi-weekly mortgage payments for borrowers, usually because the borrower’s lender does not accept them. In some cases these companies make a single extra monthly payment per year on behalf of the borrower and in the worst case, the companies keep the extra payment and defraud the borrower. In almost all cases, these companies collect ongoing fees from borrowers regardless of the value the provide.
It is important to highlight that borrowers do not need to pay a service to implement a bi-weekly mortgage program or make an extra payment. Borrowers can send their lender an extra payment of any amount at any time over the course of a mortgage and request that the payment be applied to principal. Borrowers should review bi-weekly mortgage services carefully to understand the real value they provide and to avoid potentially fraudulent companies.
"Someone offered me the ability to make 26 bi-weekly mortgage payments a year for a fee. Is there a way I can pay down my loan faster on my own without paying a fee to sign up for this plan?” CFPB. Consumer Financial Protection Bureau, September 25 2017. Web.About the author