We want to talk about something we have been doing for several years – the bi-weekly payment. Have you heard of it? You probably have. The reason why we have been doing this is because there are some great benefits – the biggest being saving tens of thousands of dollars on a mortgage. Yes, that is HUGE!
What is a bi-weekly payment?
In a nutshell, it is dividing your monthly mortgage payment in half and paying that amount every two weeks. It sounds fishy and may not make sense as to why this saves tens of thousands for the average home owner over the life of the loan, but we will explain it further so it makes sense.
The first important thing to understand is that this is different than paying twice per month. Paying twice per month will not really save you any money on your mortgage – just a bit of money over a 30-year period, but paying every two weeks instead is where the savings are found.
Basically, your mortgage is calculated at 12, once-a-month payments. But since there are odd days in each month, a total year is not 12×24 = 48 weeks, but rather 52 weeks. So by paying every two weeks, you actually end up making an extra payment each year due to those extra 4 weeks – an extra payment that will count 100% towards your principal balance (if set-up correctly).
If you simply made a half payment twice per month, you are still making the same 12 month payments (unless your interest is calculated more frequently than monthly, which is where you would save just a pinch on your interest over the life of your loan – but most mortgages are not calculated this way).
So how much can I save making a half payment every two weeks?
That’s the question of the day! It is really amazing just how much this saves! For a quick average summary for the average home owner in America with the average cost of a house and average interest rate, you can shave a good 5-6 years off of your mortgage time, thus resulting in an average of $50,000 in interest savings.
We are going to visualize this savings using an online mortgage calculator that will calculate a bi-weekly payment results as well. We are calculating using the national mortgage average amount and average interest rate to illustrate this idea.
Let’s say that you have a mortgage of $200,000 and you are paying 6% interest over 30 years. Your monthly payment is $1,199.10 and over the life of the loan (if you think that’s low its because it doesn’t include Private Mortgage Insurance (PMI), home insurance, or property taxes), you will pay at total of $431,676.38 with $231,676.38 in just interest. We know – it’s really depressing when you actually look at the numbers.
Now, if you were to take the monthly payment (you can find a mortgage calculator here) of $1,199.10 and divide this in half = $599.55 and paid this amount every two weeks, you will save $51,283.60 in interest! Plus, you will pay off your mortgage in 5.5 years less time. That is awesome!
Now this is using the American average, so if your mortgage balance is larger and/or interest rate higher – your savings would be even greater! If your mortgage balance is lower and/or interest rate lower, your savings would be less than the $50K, but for most people – this is still going to be TENS OF THOUSANDS of dollars in savings.
Besides saving tens of thousands of dollars over the life of my mortgage, are there other benefits?
Why yes, we are glad that you asked! This is from our perspective and experience. There are other great benefits. This is a type of payment system that most people will hardly even notice a change of in their budget.
In fact for us, not only did we begin the tens of thousands money saving journey several years ago, but our budget actually became more realistic and manageable for our family, with the added benefit of making that extra mortgage payment each year!
How? Well, for many (including us in the past) we would use one paycheck to pretty much cover the whole mortgage payment and not have much left over and then the the next paycheck have a lot left over. But for those two-weeks after the mortgage payment paycheck, money was tight! It was even worse when we had consumer debts. We basically had no money at any point in the month.
So, when we switched to making half payments – life became balanced! We had an equal amount of money left over each paycheck to live and it became much less stressful, and then…surprise…our balance is dropping faster as that added benefit!
That is one major benefit that we personally noticed.
Who should implement the bi-weekly payment?
That is a great question. The most natural group of people to implement the b-weekly payment system is the group that do receive a salary and are paid bi-weekly. It is the most natural transition and the least noticeable in your budget.
If you are paid bi-monthly (like the 1st and 15th) that extra half payment is going to be crossing over into other paychecks. What we mean is that a couple of times a year, the months that are longer, you will have to still make that payment every 2-weeks and so you will need a little cushion to do so. Many people still set this up on a bi-monthly paycheck schedule and just make sure to have money set-aside, but it is not as natural of a transition and will be felt a little more in the budget.
If you are hourly, contract, self-employed, etc. this is going to totally depend on your situation. Many can do it and many have! You just may not have quite the security that the first two would have and should have a money cushion in case of lean times. But, at the same time, you might find this much easier than making that big lump sum every month anyway! When we were self-employed and when I was a contractor, during both seasons of life we still did this and it was easier to make that half payment every two weeks than the bigger sum each month.
Next, if you are in debt – we do not recommend starting this until you have your high interest rate debts paid off. That money can and should go towards those higher interest rates as the savings are negated because you are paying more elsewhere.
We started this when we were “almost” out of debt. Our final portion of our $100K of consumer debt was our van. The interest rate happen to be lower than our mortgage and so once we had everything paid off and only had the van left, we implemented this program. At the same time, we quickly paid off our van in just a few months due to the accumulated debt payoff plan (that we share and will share in our 52-week Take Back Your Finances challenge). But there is not point in doing this if you will get greater savings paying other debts in the short-term. Long-term, this is a great plan, but consider your other obligations first.
Now just because you are making the bi-weekly payments doesn’t mean you can’t pay off your house even sooner (than the bi-weekly payments will facilitate). And that is where the idea of “throwing extra amounts onto your payments” and specifying “principal” on your payment will mean that you will reap even greater savings and even that much less time to pay it off. So try to make extra principal payments on top of the bi-weekly when and where you can.
One note however, is to make sure your bank knows that extra paid amounts is for the principal balance (its generally an initial checkbox or form that you need to submit the first time you send the extra amount); if you don’t, most lenders will automatically allocate your money towards the interest. I actually had a prior boss that her and her husband both sent in a house payment the same month; because they had not specified to apply extra amounts to principal, the whole amount of the “second payment” went towards their interest and not their principal. Don’t let this happen to you!
How do I start making bi-weekly payments?
Another great question and one that will have a little different answer for each household. First, you do need to find out if your mortgage lender will even allow this type of payment system, including early pay-off. Some do not, but most will. Most will already have an option through them to allow you to setup automatic withdrawal so its paid directly from your bank account. That is obviously the easiest, no-brainer way.
Some lenders may also charge a set-up fee ranging from $100 on up to set this up in your account for you while others will offer this payment option for free. Some even may require a full payment upfront and start your bi-weekly payments the following month…it all depends on how your loan was set up.
These are the questions that only your lender can answer, but at least you might have some idea of what to expect.
One final note is that we do not believe its necessary is to have this set-up and paid through a third party; many companies are out there that will try to get you to set this up with them…all for a nice fee that is excessive and unnecessary. With a little leg-work at the beginning, you can set this up yourself and save those fees by working directly with your lender and setting this up yourself.
Disclaimer: We are not licensed bankers or lenders; as such please do not consider this professional advice. Instead we encourage you to always solicit and work with your lender to understand the terms and conditions of this payoff strategy prior to implementing any of the ideas presented in this post.