Bi-weekly mortgage payments seem to be all the rage, promising
the hope of paying off your mortgage early. While it will do that, I was
wondering wouldn’t it be better to divide your payment by twelve and just pay
that little extra in principle every time you make your monthly payment? Well
in this article we will explore each method so you can decide for yourself
which would be better.
First what is a Bi-Weekly Mortgage Payment?
A bi-weekly mortgage payment is when you pay half of your
mortgage payment every other week. Since there is 52 weeks in a year you will
make 26 half mortgage payments a year. This means you will make 13 whole
payments a year, essentially making one extra mortgage payment a year.
For my example going forward I will use a $200,000 mortgage for
this experiment. Looking at the charts below, if you have a $200,000 mortgage
at a 4% interest rate over 30 years, your payment will be $954.83 a month. Over
30 years you will have paid an extra $143,739.01 in interest, making your total
payment $343,739.01. Keep in mind the $954.83 payment does not include taxes,
insurance or private mortgage insurance. But if you are on the bi-weekly
mortgage plan, your payments will be $477.42 every two weeks. This makes your
total interest payment $120,360.32 over 25 years, 11 months and a total payment
of $320,360.32.
$200,000 mortgage @ 4% interest based on 30 years
|
|
Payment
|
Total Interest
|
Total Payment
|
Years
|
|
Monthly
|
$954.83
|
$143,738.80
|
$343,738.80
|
30 years
|
|
Bi-Weekly
|
$477.42
|
$120,360.32
|
$320,360.32
|
25 yrs 11 months
|
Now I wanted to know if there would be a difference in
interest paid and years if you just divided the monthly payment over 12 months
and just added that amount to the monthly payment. The chart below shows my results.
If you take the monthly payment of $954.83 and divided by 12 months, you get
$79.57. Now if you add the $79.57 in principle to your $954.83 payment every
month means you are now paying $1034.40 a month.
|
|
Payment
|
Total + $79.57
|
Total Interest
|
Total Payment
|
Years
|
|
Monthly
|
$954.83
|
$1034.40
|
$121,473.38
|
$321,473.38
|
25 yrs 11 months
|
Although doing biweekly payments would save you $1,113.06 in
interest, in comparison to paying the extra $79.57 in principle per month, it
still pays off in 25 years and 11 months. For me I like making a payment monthly. Since
I keep an excel spread sheet to track my spending and keep a budget, I feel like
I have more flexibility in my spending by making my mortgage payment with one
paycheck and the other household bills with my second paycheck of the month. Plus
if I have an unexpected expense like my Air condition unit going out or car
repair, I now have a month to reevaluate my budget and make sure my mortgage is
paid. When you do biweekly payments you only have two weeks to make changes
before the second half of your mortgage payment is due.
Now that I have done all the work for you, it is up to you
to decide which method you prefer.
Ms. Smart
Mortgage calculators courtesy of Bankrate.
