6 Things You Should Know About a Bi-Weekly Mortgage

Bi-weekly mortgages often seem too good to be true, which makes some individuals shy away from the concept. In truth, a biweekly mortgage is a legitimate home loan option, and it can help you pay off your mortgage six to eight years ahead of schedule. If you are considering ways to pay off a mortgage, consider these six things.

1. The Biweekly Payment Schedule

With a biweekly mortgage, you make a payment every two weeks. If you struggle to budget for a full mortgage payment each month, then this can be an attractive solution, especially for individuals who get a paycheck every two weeks.

2. Saving Money With a Biweekly Mortgage

When you compare a conventional mortgage to a biweekly payment plan, the amount you pay each month is usually the same. This often leads to confusion over how a biweekly plan saves you money. The answer lies in the math.

A traditional mortgage divides the payments by the length of the term, which results in 12 payments per year. With a biweekly payment plan, you make 26 payments. If you divide this into the monthly equivalent, it equals 13 payments. In effect, you make one additional payment per year. This "extra" payment allows you to save money.

3. The Cost of a Biweekly Home Loan

When you're buying a home, you may get an offer from a lender about switching your mortgage to a biweekly plan. This usually points out how much money you can save while downplaying the cost. However, a lender won't extend credit for free.

To join the program, you usually have to pay an enrollment fee, which can range from $295 to $379. Additionally, the lender may charge a processing fee or some other charge for handling the mortgage payment plan. To determine whether you'll save money, use a mortgage calculator to see how much you'll save by prepaying the loan.

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4. How Does a Biweekly Mortgage Affect Your Credit?

While you can pay off your mortgage earlier with a twice-monthly payment, this type of home loan won't necessarily affect your credit. In many cases, the lender managing the payments will process your payments as one monthly payment. Provided you make the payments on time, the payments will have the same impact on your credit. As with other home loans, paying late will negatively affect your credit score.

Compound interest is another area of confusion for some homeowners when it comes to bi-weekly mortgages. Whether the payment reduces the amount of compounded interest will depend on when the processor makes the loan payment. If the company holds onto the first payment and makes one payment each month, then the compound interest remains the same until the extra payment reduces the principal at the end of the year. Some financial experts view this setup as you loaning the money to the processor for free for a two-week period.

5. Free Alternatives to the Bi-Weekly Home Loan

You don't have to join a payment program to take advantage of the biweekly mortgage. As long as your lender doesn't have an early payoff penalty, you can add extra funds to your payment. By applying the extra to the principal, you can accomplish the same benefits of the biweekly mortgage. Here are some suggestions you can incorporate:

• Divide your monthly payment by twelve and add that amount to your monthly house payment. At the end of the year, you'll have made one additional payment.


• Make one lump sum each year. This option works great for individuals who plan to get a tax return or for those who normally get a Christmas or holiday bonus.


• Add extra money to your payments whenever you can. You can track your progress with mortgage calculators.

6. Other Factors Can Affect a Biweekly Loan

Some lenders will require you to pay a hefty fee if you try to pay off a mortgage prior to the end of the term. Additionally, other factors may prevent this type of mortgage from being the best option. For example, if you are planning to move in five or six years, it would make sense to put the extra money into a fund you can access without having to sell the home. In fact, other situations, such as the need to build an emergency or retirement fund, may require you to have access to the cash rather than having it tied up in equity.

While many homeowners appreciate the ability to pay off a mortgage early because of a biweekly payment plan, others prefer to work with a conventional mortgage. Considering these six things can help you determine whether to switch to this payment option or not. You can also use our mortgage calculator to help you see how the different options will affect the overall cost of your loan.