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Money Matters

Biweekly mortgage payments

Dear Money Matters,
I heard that paying your monthly mortgage in two installments of 50 percent each month pays the mortgage much quicker than paying 100 percent once a month. Does this make sense?

Dear Robie,
You're close. I believe you're referring to a biweekly mortgage payment program.

Its concept is rather simple. Rather than sending your mortgage holder 12 monthly payments a year, you send them half your monthly mortgage payment every two weeks.

Notice that it's every two weeks, not a half payment every half month. A half payment every half month does little to help you.

But paying biweekly takes care of your annual mortgage obligation in only 48 weeks. From there, the remaining four weeks of payments goes directly to the principal.

That's where your savings can really add up. Using Bankrate.com's biweekly mortgage payment calculator, I worked up a $100,000, 30-year mortgage at 6.80 percent. With a conventional mortgage, you pay $651.93 a month, and over the life of the loan, you pay more than $134,000 in interest.

However, going with a biweekly mortgage payment plan of $325.96 every two weeks cuts your overall interest costs down to roughly $101,000. On top of that, you pay off your mortgage six years sooner.

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There are, however, caveats to bear in mind. First is whether your current lender will let you convert to a biweekly mortgage. Many lenders offer the program, while others do not.

The second concern is how complicated the changeover from monthly to biweekly will be. In my case, all I needed to do was notify my lender that I wanted to change over to a biweekly plan. They sent me new vouchers, and that was the length and breadth of it.

Some, however, require that you effectively refinance your mortgage, which involves all the costs and fees associated with re-tooling a loan. With others you need to attach instructions with each check to ensure that each biweekly payment is applied properly.

Another consideration is a proliferation of companies that advertise that they'll set up a biweekly mortgage program for you for a modest fee (usually a few hundred bucks). Those charges can come as an upfront charge or may be amortized over a series of payments.

Be careful about this. If you can set up a biweekly payment program with your lender on your own, don't waste the money having someone else do it for you. And, if going through a third party is your only seeming option, make sure that you're going to stay in your home long enough to recoup whatever costs were attached to the biweekly changeover.

On the plus side, a third party setting up your biweekly mortgage offers greater security that your biweekly loan will, in fact, remain a biweekly loan. For example, if you set up a biweekly yourself with your bank and it turns around and sells the loan to someone else, the biweekly plan may not necessarily transfer to the new mortgage holder.

Another issue is how often you get paid. If you're in the armed forces or a teacher, there's a good chance you're only paid once a month. That can make house payments every couple of weeks tougher on you than someone who gets a check more frequently.

If the notion of a biweekly mortgage somehow seems too rigid or you can't, or don't want to, hassle with setting one up, there's still no reason you can't take advantage of prepaying your mortgage. All that requires is tossing in a few extra dollars when you write your monthly payment.

To be more specific, take your monthly mortgage amount, divide it by 12 and tack on that amount every month. That effectively adds an extra monthly payment every year -- the same objective achieved by a formal biweekly payment plan.

For more details on biweekly mortgages, have a look at our story "Do you really want to pay your mortgage biweekly?"

-- Posted: June 3, 2002

More Money Matters columns
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See Also
The pros and cons of biweekly mortgage payments
How to pay off your mortgage early
More Money Matters stories


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