This is the third post for our Prepayment Strategy Series (check out all the posts in this series).
Bi-Weekly Payments
The bi-weekly prepayment strategy works for a couple of reasons. Many people are paid bi-weekly so paying the mortgage on the days you get paid makes budgetting easier. But just because it is easier doesn’t mean it helps in prepaying your mortgage – so how does it help pay off your mortgage faster? If you were to take your mortgage payment and divide it in half and pay that amount every other week you would end up making two additional payments for half of the amount due. That results in a full payment going towards the principal balance each year. Let’s look at a simple example:
Monthly mortgage payment of $1,000
$1,000 X 12 payments = $12,000 in annual payments
Half of the payment = $500
If you pay every other week you pay 26 times throughout the year
$500 (half payment) X 26 payments = $13,000 (or $1,000 more = 1 extra payment each year)
Hidden Costs?
Some mortgage lenders charge you to make extra payments or to set up your mortgage on a bi-weekly payment schedule. I did a little of research for you and have a few lenders and their hidden costs to set up a bi-weekly payment plan:
- Bank of America – $8 per month
- Citi Mortgage – $375 one time fee and $1.50 per payment ($3 per month)
- Wells Fargo – Free with auto debit from checking account
Bi-Weekly Payments in Action
We are going to stick with the same loan amount, purchase date, etc from our first example.
- Loan Amount = $186,500
- Rate = 5%
- Term = 30 Years, Fixed
Overview of Mortgage with no Prepayment
- Minimum Payment: $1,001.17 (see why I chose $186,500 loan amount!)
- Payoff Date: Feb 1, 2042
- Interest Paid Over 30 Years: $173,922
Bi-Weekly Payments with $0 Hidden Costs
- Minimum Payment: $1,001.17
- Payoff Date: May 1, 2037
- Early Payoff: 4 Years, 9 months
- Interest Paid Over 30 Years: $142,805
- Interest Saved Over Full Term: $31,117
Bi-Weekly Payments with $375 + $78/yr Hidden Costs
- Minimum Payment: $1,001.17
- Payoff Date: May 1, 2037
- Early Payoff: 4 Years, 9 months
- Interest Paid Over 30 Years: $142,805
- Extra Fees: $375 (one time fee) + $1,974 (charge per payment) = $2,349
- Interest Saved Over Full Term Minus Costs: $28,768
