Accelerated mortgage payments: Bi-weekly mortgages explained

by Starla Ross

Setting up your mortgage into bi-weekly payments may just be one more way to simplify your life, while saving money at the same time.

Just as easy as it sounds, a bi-weekly mortgage allows you to pay one-half of your mortgage payment every two weeks versus paying one large mortgage payment each month.

Most banks require the bi-weekly payment to be automatically withdrawn from a checking or savings account, which essentially places your mortgage payment on "auto pilot." You won't have to worry about late payments or fees, and you'll have the assurance that your mortgage payment is paid (as long as the money is in your account, of course).

Because the payment is withdrawn automatically, many lending institutions will allow the payment to be set up according to your pay schedule. This offers convenience, as well as simplifies your budget.

While some families choose a bi-weekly plan for simplicity, most seek a bi-weekly mortgage because of the significant savings in interest charges. When you pay every two weeks, you're making 26 half-payments per year (or 13 mortgage payments). This extra mortgage payment helps to pay down your mortgage principle (and therefore interest too) at a quicker rate. The result? Less interest paid and a shorter time to pay on your mortgage.

Let's say, for instance, you purchase a home for $200,000. You have a sizable down payment, and your mortgage balance at closing is $160,000. With a traditional 30-year fixed rate mortgage and an Annual Percentage Rate (APR) of 7-percent, you would pay a monthly payment amount of $1064. Over the course of 30 entire years, you would pay $223,214 in interest charges.

Using a bi-weekly payment plan, with the same traditional 30-year fixed rate mortgage and an APR of 7-percent, you would pay $532 every two weeks (averaging $1153 per month). In the coming years you would pay only $166,334 in interest charges and have your loan paid off in only 23 years.

There can be some fees associated with a bi-weekly mortgage payment. If you're interested in setting up a plan, call your mortgage lender and ask whether one is available, and if so what fees may be charged. Some lenders require a one-time fee ranging from $150 to $350, while other lenders may charge a monthly fee of $4 or more. Even with the cost of fees, the savings can be significant. Be sure to calculate the cost of fees when determining if a bi-weekly payment plan is right for you.

Some mortgage lenders will not offer a bi-weekly plan directly, but offer a plan through a third-party service. The third-party provider will provide the same service as the mortgage lender (i.e. withdrawing a half-payment every two weeks and forwarding it to the lender). The same guidelines apply when working with a third party. Be sure to ask what fees will apply for the service and exactly how the payments will be handled.

With the small amount of work involved with setting up a bi-weekly mortgage payment, there's little wonder many people are choosing this service as one more way to increase the value and investment of their largest purchase - their homes.