Dear Dr. Don,
I am told by my mortgage holder that by paying $120 a month more, I will achieve the same principal and interest payments as though I were paying my mortgage every two weeks.
I have a $251,182.30 outstanding on a 30-year, fixed-rate mortgage at 5.125 percent. The monthly payment is $1,433. Is the lender correct, or should I be looking at a biweekly mortgage?
-- Anthony Adjusts
The lender is correct. The magic in how a biweekly mortgage shortens the life of your loan is from making the equivalent of 13 monthly mortgage payments a year, not in the intra-month reduction of interest expense.
If you make an additional principal payment of $120 each month, that's $1,440 for the year --almost exactly equal to one additional monthly mortgage payment. Since there are often additional fees associated with a biweekly mortgage, you're saving on the fees, too.
I don't recommend biweekly mortgages. Making the additional payments contractual, and paying a fee for doing so, just doesn't make sense. It's just as easy to set up the payments to make monthly additional principal payments, and you can skip a month when money is tight, or double up when you have a little slack in your monthly budget.
Bankrate does have a Biweekly mortgage payment calculator so you can calculate the interest expense from using a biweekly mortgage. Use Bankrate's Mortgage calculator to calculate the total interest expense by making the additional principal payments. It will be very close.
I'd do the math for you but I don't know how many months you are into your existing mortgage.
If I assume that it is a new 30-year mortgage at 5.125 percent, the biweekly mortgage will have $433.29 less in total interest expense over its term than the 30-year mortgage with $120 a month in additional principal payments.
In my opinion, it's not worth jumping through the hoops to try and capture that savings. With both approaches, you'd shave about five years off the life of the loan.