 Little
advantage to biweekly payments
|
 Dear
Dr. Don,
I understand that by making biweekly mortgage payments a
homeowner can save thousands on interest over a 30-year period. I have a 30-year
fixed rate mortgage paying $1,300 monthly.
-- Vexed Vilay
 Dear
Vilay,
I don't know if your lender is compelled to accept biweekly payments
from you. My guess is that it's not because it's not how the loan
agreement is structured, but I do know that there is no compelling
reason to pay your mortgage on a biweekly basis.
The interest savings on a biweekly mortgage doesn't
come from interest savings within the month from the more frequent
payments. Instead, it comes from making the equivalent of 13
monthly mortgage payments per year (26 x ½ monthly payment
= 13 monthly payments).
With the additional fees and expenses associated with
most biweekly mortgage plans, it's smarter to make additional principal
payments on a regular basis. Either include one-twelfth of
a mortgage payment each month, as an additional principal payment,
or make additional principal payments in months where you have a
three-paycheck month, if paid biweekly, or a five-paycheck month
if paid weekly.
To preserve financial flexibility, it's always better
to not make the additional principal payments contractual. When
you switch to a biweekly mortgage loan you give up that flexibility. Bankrate
has a biweekly mortgage
calculator that shows the interest savings by paying biweekly. You
can compare it to the interest savings by making an additional principal
payment of one-twelfth of a mortgage payment each month.
Bankrate's mortgage payment calculator will allow
you to easily do that calculation. I've done a comparison between
the two approaches for a $200,000 30-year fixed-rate mortgage at
6.5 percent.
 |
Calculating payments | |
| $ 200,000 |
$ 200,000 | $ 200,000
| | 6.50% | 6.50% | 6.50% |
| 360 | 288 | 290 |
|
$ 1,264.14 | $ 632.07
| $ 1,369.48 |
|
$ 255,088.98 | $ 194,430.48
| $ 196,920.03 |
| |
$ (60,658.50) | $ 2,489.55
|
As you can see, the biweekly mortgage has a
slight edge over just making additional principal payments, but that's before
considering any of the costs you face with converting to a biweekly mortgage.
To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "financing
a home," "saving & investing" or "money."
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