Biweekly Mortgages Explained: How They Work, Types, and Examples
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Summary:
Are you considering a biweekly mortgage for your home loan? This payment schedule allows you to make mortgage payments every two weeks, which translates to 26 half payments or 13 full payments per year. Discover the advantages and disadvantages of this mortgage type, how it works, and how it can help you save on interest and pay off your mortgage sooner. We’ll also explore the difference between biweekly and bimonthly mortgages and provide insights into how you can create your own biweekly mortgage to enjoy the benefits without added fees.
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What is a biweekly mortgage?
A biweekly mortgage is a unique home loan repayment plan that departs from the traditional monthly payment system. With a biweekly mortgage, borrowers make payments every two weeks, resulting in 26 half payments per year, effectively equaling 13 full payments in a year. This approach accelerates the loan payoff, offering both advantages and disadvantages that borrowers should carefully consider before opting for this payment plan.
How a biweekly mortgage works
A biweekly mortgage operates by allowing borrowers to make the equivalent of one extra month’s mortgage payment within a year. For instance, if your monthly mortgage payment is $1,200, a biweekly mortgage plan would entail making two payments of $600 every two weeks. This arrangement effectively means you’re making 13 full payments within a year, which can help pay off your mortgage faster.
Advantages and disadvantages of biweekly mortgages
Before committing to a biweekly mortgage, it’s crucial to weigh the pros and cons associated with this unique payment schedule. Here, we’ll explore both sides of the coin.
Advantages of biweekly mortgages
Faster mortgage payoff
A significant advantage of biweekly mortgages is that they enable borrowers to pay off their mortgages sooner. For example, let’s consider a $200,000 mortgage with a 5% interest rate and a 30-year term. With a biweekly mortgage, you could potentially pay off the loan in 25 years, five years earlier than a traditional monthly payment mortgage. The extra annual payment can add up significantly over time, allowing you to own your home sooner.
Interest savings
Biweekly mortgages lead to substantial interest savings. In the example mentioned earlier, a traditional mortgage would cost you $187,000 in interest over its lifetime. In contrast, a biweekly mortgage would reduce the interest cost to $151,000. This means you could save $36,000 in interest by opting for a biweekly mortgage.
Quicker equity buildup
With a biweekly mortgage, you build home equity faster. Home equity represents the portion of the home that you own. This equity can be accessed for various purposes, such as home improvements or other financial needs. By paying off your mortgage more quickly, you can accumulate equity at a faster pace.
Disadvantages of biweekly mortgages
Payment processing
Some mortgage companies may not apply biweekly payments immediately. They may hold the first payment of each month and wait to receive the second payment before forwarding both to the lender. This can somewhat negate the advantage of the biweekly schedule, as payments may not be consistently applied to the loan every two weeks.
Fees
Certain lenders and mortgage companies may charge fees to establish a biweekly mortgage. These fees are intended to compensate for the lost interest due to borrowers paying off the loan earlier. It’s essential to consider whether the potential savings outweigh the fees.
Payment commitment
A biweekly mortgage typically requires a firm commitment to making payments every two weeks, and this schedule cannot be changed from month to month. Borrowers need to ensure they can maintain this payment frequency, considering their income and other financial obligations.
Biweekly mortgage vs. bimonthly mortgage
It’s important to note that a biweekly mortgage is distinct from a bimonthly mortgage. While both involve accelerated payment schedules, they differ in key ways.
Biweekly mortgage
This payment plan results in 26 payments per year, with payments occurring every two weeks. The extra payments are better for saving on interest and paying off the loan sooner.
Bimonthly mortgage
With this schedule, borrowers make two payments per month, totaling 24 payments in a year. This schedule adheres to a monthly calendar. While it still accelerates payments, it doesn’t provide the same level of interest savings as a biweekly mortgage.
Creating your own biweekly mortgage
If you’re a disciplined borrower looking to enjoy the benefits of a biweekly mortgage without incurring additional fees, you can structure your own payment plan to mirror the biweekly schedule. Here’s how you can do it:
Make payments every two weeks
You can make payments every two weeks, ensuring that your mortgage company applies these payments immediately to maximize interest savings.
Divide monthly payment
Divide your monthly mortgage payment by 12 and set aside that amount every month for a year. At the end of the year, make an extra payment, effectively replicating the benefits of a biweekly mortgage.
Under a traditional mortgage, each monthly payment includes both interest and principal. Initially, the payments consist mostly of interest, but the principal portion gradually increases over the life of the loan. The interest calculations are based on the assumption of 12 monthly payments per year. When you submit an additional 13th payment, most lenders will apply the entire amount to the principal, hastening the loan payoff.
Frequently asked questions
What is a biweekly mortgage payment?
A biweekly mortgage payment is a unique repayment schedule where borrowers make payments every two weeks, resulting in 26 half payments or 13 full payments in a year. This accelerated payment plan helps pay off the mortgage faster and reduce total interest costs.
Are biweekly mortgages a good choice for all borrowers?
Biweekly mortgages can be beneficial for borrowers who have a consistent cash flow and want to pay off their mortgages sooner while saving on interest. However, they may not be suitable for those with irregular income or who cannot commit to the biweekly payment schedule.
What’s the difference between a biweekly and bimonthly mortgage?
A biweekly mortgage involves making 26 payments per year, with payments every two weeks. In contrast, a bimonthly mortgage requires two payments per month, totaling 24 payments per year. Biweekly payments offer better interest savings and faster loan payoff.
How can I create my own biweekly mortgage?
To create your own biweekly mortgage, you can make payments every two weeks or divide your monthly mortgage payment by 12 and set aside that amount every month for a year. At the end of the year, make an extra payment to replicate the benefits of a biweekly mortgage.
Key takeaways
- A biweekly mortgage involves making payments every two weeks, totaling 26 half payments or 13 full payments per year, speeding up the loan payoff.
- Advantages of biweekly mortgages include faster mortgage payoff, reduced interest costs, and quicker equity buildup.
- Disadvantages may include payment processing issues, fees, and a firm commitment to the biweekly payment schedule.
- Biweekly mortgages differ from bimonthly mortgages, offering better interest savings.
- Borrowers can create their own biweekly mortgage by making payments every two weeks or setting aside a portion of their monthly payment each month.
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