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Biweekly Payment Plans
Mortgage Library: Types of Loan Programs: Biweekly Payment Plans
With biweekly payments, you pay half of the monthly mortgage payment every 2 weeks, rather than the full balance once a month. This is comparable to 13 monthly payments a year, which can result in faster payoff and lower overall interest costs. For example, the biweekly mortgage payment process can pay off a $200,000 30 year fixed loan at 7% in approximately 24 years (75 months sooner than a standard payment plan), with a total of $68,925 in interest savings.
Your lender might offer several biweekly payment options, where you make a payment that equals half of your normal monthly payment every two weeks. There is a considerable difference between different payment plans, so you should check with the lender to find out how they will treat your biweekly payments, exactly.
What most borrowers get when they convert their loan from monthly to biweekly payments is a pseudo biweekly (or standard biweekly) payment plan. On the pseudo biweekly, the biweekly payments are credited to an account managed by your lender. Once a month, as with standard payments, the monthly payments are made out of that account. The excess amount accumulated in the account by the end of each year is equal to a full monthly payment. At this point your lender makes a double payment.
In order to set up a true biweekly (or simple interest biweekly) payment schedule, you must have a lender that will immediately credit each 1/2 monthly payment upon receipt. The lender must calculate interest for two-week intervals and apply the biweekly payments less the interest to reduce principal every two weeks.
Biweekly payments should not be confused with bi-monthly payments.
Semi-Monthly or Bi-Monthly Payments
The payment option commonly called 'bi-monthly' is a biweekly payment option, however, some lenders offer a true bi-monthly payment service to homebuyers.
With true bi-monthly (or semi-monthly) payments, you pay half of the monthly payment twice a month (for example, you pay 1/2 of the monthly payment on the 1st of the month, and the other half on the 15th). There will be a total of 24 semi-monthly payments in a twelve-month period and the lender must not hold the payment until the end of the month and apply it to the loan balance right away.
Semi-monthly or bi-monthly payment plans don't achieve the same results as the biweekly payment plan and are rarely used. On a 30 year fixed mortgage, for example, it will take 29 years and 11 months to pay off (1 month sooner than a standard payment plan), and you will save only one month's interest.
Please note that if your lender withdraw half of the monthly payment from your bank account every half of the month, but apply the payments to your loan only once a month (as they did before), you will save nothing at all. This kind of bi-monthly payments, however, allow you the flexibility to schedule your monthly payments in a way that works better with your personal finances.
'Do it Yourself' Biweekly
If your lender does not offer a biweekly program and you are interested in paying it off early, you can open a bank account, arrange for it to make your monthly mortgage payment every month and pay half the monthly payment into the account every two weeks. At the end of each year, write a check on this account for an amount equal to your monthly payment and send it to the lender.
There is another simple method for prepaying a mortgage loan. Add an amount equal to 1/12 the monthly mortgage payment to each monthly payment and you will pay off the loan a little earlier than if you take out a standard biweekly.
Payment Plans Comparison Chart
Loan Term: 30 Years | Loan Amount: $100,000.00 | Interest Rate: 7.000%
Involving a Third Party
There are intermediary companies that can set up a pseudo biweekly payment plan for you, for a fee. They usually debit your account every two weeks, but only pay your lender once a month, so the extra payment doesn't get applied to your loan until the end of the year. A third party will probably have an enrollment and bimonthly transactions fees and will hold your money, earning interest from the deposit. If you decide to use a third party review carefully any promises of savings, and be sure to weigh any savings on your loan against their fees.
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