Freddie Mac reports the average rate on a 30-year fixed mortgage was 2.94 percent this week.
What is a biweekly mortgage?
A biweekly mortgage is a home loan for which the buyer makes payments every two weeks instead of once a month. The amount paid is exactly half of the monthly payment, and choosing a biweekly mortgage results in a total of 26 payments per year instead of 12. This means that the total amount paid over the year is equivalent to 13 monthly payments, and consequently the mortgage is paid off sooner.
When your mortgage payments are calculated, they’re based on 12 monthly payments spread out over the number of years of the mortgage. When you decide to pay your mortgage biweekly, your monthly payment is halved and paid every two weeks.
Although many people believe that the benefit of this is that it reduces interest charges, this is not correct, and it’s not the reason why a biweekly mortgage reduces the time it takes to pay off your mortgage. The real reason why it’s beneficial is that, compared to monthly payments, you’re actually making one extra payment every year. This is the same as it would be if you paid an extra 8.3 percent every month on a monthly mortgage. It’s because of this extra payment that your mortgage period is shortened.
The difference that the extra payments make is immense, and depending upon interest rate and the length of your loan, it can shave as many as four years off a 30-year mortgage. The other benefit is that you repay your interest faster, so if you relocate and sell your home, the outstanding balance on your loan will be lower.
Biweekly mortgage example
Imagine that your monthly mortgage payment is $1,500. This means you pay $18,000 per year toward your home loan. Now, imagine that you choose biweekly mortgage payments instead, making $750 payments every two weeks. Because you make 26 payments over the course of the year, with a biweekly mortgage you end up paying $19,500 per year instead of $18,000.
Before agreeing to a biweekly mortgage, ensure that your mortgage agreement allows you to pay the loan off in a shorter period without penalty.
Are you interested in a biweekly mortgage? Check out our biweekly mortgage calculator.