Typically homeowners think about mortgage payments in terms of a monthly bill. But, there is a different payment plan that can save you a bundle of money over time. Known as the bi-weekly mortgage payment plan, homeowners pay a mortgage installment every two weeks instead of monthly.
In this plan the homeowner pays half of their monthly payment amount every other week. For example, if your mortgage payment is normally $1,800 per month, you would pay $900 every two weeks. What is the benefit? Essentially you’ll end up making an extra mortgage payment each year, which will be applied directly to your principal balance. This saves thousands over the life of your loan, reduces what you pay in interest, and can help you own the home outright years sooner.
How to set up a bi-weekly plan
If you are currently home shopping, about to obtain a mortgage, or refinancing, you can ask to be set up with a bi-weekly plan. If you already have a mortgage, look online at your account and see if you can switch to this option. If there isn’t a way to change your mortgage payment plan to bi-weekly, you can actually do it yourself and produce the same long-term results.
- Divide your monthly mortgage payment by 12 (months)
- Add this amount to each of your monthly payments, which will deliver the same effect of having an additional payment applied to your loan each year.
- Be sure to clearly indicate that the additional money is to be applied to principal.
Here’s an example: If you pay $1,000 per month on your mortgage, one-twelfth of that amount is $83.33. So, by paying $1,083.33 per month instead of $1,000, you’re effectively getting the same benefit as a bi-weekly payment plan.
When are bi-weekly payments not a good idea?
There are situations where putting cash toward reducing your mortgage principal may not be the best way to target your debt:
- If you have outstanding credit card debt, or any other debt with a significantly higher interest rate than your mortgage, it’s usually a good idea to pay that off first.
- If that extra money would be better used toward retirement, college, or emergency savings.
As a homeowner, it pays to look for ways to reduce the overall cost of ownership. If you have the funds available, a bi-weekly mortgage payment may be right for you.