Q: I refinanced two years ago and received an offer to pay biweekly instead of monthly. Will this help to reduce my mortgage more so than with monthly payments? If so, how/where can I apply? Is there a calculator available on your site to compare?
A: Making biweekly payments on your mortgage will absolutely cut your interest cost and shorten the term of your loan, to boot. Usually done though an auto-debit arrangement from an account you specify, the mortgage lender will sweep though that account every two weeks and collect exactly half of your required monthly payment.
How does it work?
While there are only 12 months per year, there are actually 26 two-week periods. This means you are essentially making 13 monthly payments per year. In today's market, and if started from the first monthly payment, this reduces the term of a 30-year loan to about 25 years, saving you a bundle in interest costs.
How much are the savings?
On a $200,000 mortgage at 5 percent, you'll cut the total term by just about five years, while shaving off over $34,000 in interest cost.
Biweekly payments can be valuable, but there's no magic to them. In fact, if you are both responsible and dedicated, you can simply send in an extra monthly payment once per year and achieve nearly the same savings. The biweekly plan just makes it happen automatically.
That said, you should check the fine print. While it's OK for a lender or firm to charge you a one-time set up fee, watch out for any recurring transaction fees which can diminish your savings over time.
To compare regular payments versus biweekly payments, use our mortgage calculator to see how you can save money with biweekly mortgage (or other) prepayments. Or, if you have a specific pay-off date in mind, be sure to try our It’s My Term Prepayment Calculator.