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Mortgage “Half” Payments: How Much Do They Save?
Many mortgage lenders offer borrowers the ability to make half-payments twice a month on their mortgage or make bi-weekly payments instead of making a full payment once a month. How do bi-weekly payments work? What about twice-monthly payments? Which is the right option for you?
An example of how bi-weekly payments work
Let’s say, for example, you’re in the situation that Paul, a Simple Dollar reader, finds himself in. He just took out a $219,000 mortgage. His monthly payment on that mortgage is $1,300.89. Paul wants to know whether paying half of the mortgage twice a month will save him a significant amount.
The first thing he needs to do is make sure that his mortgage allows early payments – and how they work. Make a call to your lender and ask them how often interest is compounded (this is usually compounded daily or compounded monthly based on the average balance of the month – if it only compounds monthly, paying in advance won’t help), plus how multiple payments during a month are applied to your loan (they must be applied as soon as received for this to work). Most loans work this way, but not all. If you’re interested in this plan but your lender does not allow early payments, you can manage a similar half-payment plan all on your own.
There are two options with making early payments.
Bi-monthly mortgage payments
First, Paul can literally make two payments a month – say, on the fifteenth of every month and on the last day of every month. This is known as a bi-monthly mortgage payment. This means, over the course of a year, Paul pays the exact same amount in principal that he would otherwise pay. The only difference is that on the fifteenth of each month, he pays in half of his payment and at the end of each month, he pays in the remainder of his payment.
If you assume monthly compounding using the average balance of the last month, Paul will save just over two months’ worth of balance on the mortgage. He’d save $2,931.33 in interest, which would mean he would be able to skip his final two payments and make only a partial final payment.
Bi-weekly mortgage payments
Another method of doing this would be to simply make a payment equal to half of the amount of the monthly mortgage bill every two weeks. This is known as a bi-weekly payment. Over the course of a year, this adds up to one extra full payment: since there are 52 weeks in a year, you’d make 26 half payments, and thus 13 full payments.
Again, assuming monthly compounding using the average balance from the last month, this method will save Paul $41,117.09 over the course of the loan. His final, partial payment would be issued just shy of five years early.
This method falls perfectly in line with many income schedules (the federal government, for example, issues paychecks every two weeks), which means that you can just allot a certain amount from each paycheck directly toward your mortgage and then not think about it again.
For some, bi-monthly or monthly payments are best because their paychecks do not line up well with a bi-weekly schedule. Also, some families might struggle to make a full half mortgage payment every two weeks.
On the other hand, biweekly payments – once every two weeks – do provide a lot of financial incentive to give them a shot. Add on top of that the fact that it’s directly in line with many pay schedules and it’s a financial winner.