Making bi-weekly payments on a mortgage is a popular strategy. In this strategy, borrowers make half a mortgage payment every two weeks resulting in 26 half-payments, or 13 full payments, over the calendar year. The process results in one extra principal and interest payment being prepaid each year, thus paying off the mortgage at an accelerated rate and providing additional interest savings over the term of the loan.

Here is a mathematical example to demonstrate the savings effect of a biweekly repayment schedule:

Let’s say you have a $280,000 30-year fixed rate mortgage at 6.00% with a principal and interest payment of $1,679. If you held the mortgage for 30 years, you would make 360 payments and pay back a total of $604,347 with $324,347 of that being interest.

If you make biweekly payments of $840 every two weeks, you will pay back a total of $535,601 with only $255,601 of that being interest, and pay off the entire mortgage balance in 24.5 years.

In this example, bi-weekly payments will provide a total interest savings of $68,746 and knock 5.5 years off the term.

Most borrowers opt for this strategy to pay the loan off faster and save money on interest. Other borrowers who get paid on a bi-weekly payroll schedule find it helpful for budgeting purposes to have a half payment debited from their account on their pay date.

Since bi-weekly payments equate to less than a full mortgage payment, they are considered partial payments and are not accepted by all loan servicers. Lenders that do allow bi-weekly payment schedules always require the borrower to prepay their mortgage account one month ahead. With a one-month surplus in the account, a half-payment received every two weeks is considered a prepayment rather than a partial payment and can be applied to the account. For many homeowners, staying a payment ahead is not ideal, but don’t fret…there is another way to realize the same interest-saving benefit of bi-weekly payments without having to pay a month in advance.

Here’s the secret: the payments do not need to be made every two weeks. As long as one additional principal and interest payment is applied each calendar year, it doesn’t matter how you get there. The most common practice is to simply divide your principal and interest payment by 12 and pay that amount as an additional principal payment each month. For example, in the scenario above we can simply divide the $1,679 P&I payment by 12 and send in an additional principal payment of $139.92 each month. This is good news for anyone who does not want to pay their mortgage a month in advance to set up actual bi-weekly payments.

Author: Chris DeMatteis, NMLS ID 214872