A common mortgage prepayment method is the bi-weekly payment plan. Instead of paying the mortgage bill monthly, the payment is every two weeks (biweekly). Since some months have more than 4 weeks in them, by the end of the year the total number of payments will reach 26 (52 weeks / 2). The 26 biweekly payments per year are equivalent to 13 regular mortgage payments per year. The end result is paying your mortgage off earlier and paying less interest over the life of the loan.
Many companies in the finance industry offer bi-weekly services, for a price. Some can cost as much as $400 for setup, and may charge in upwards of $39 a month in administration fees. Since banks and mortgage companies are out to make money (shocking I know), the biweekly mortgage option makes for a great carrot on a stick. The lure of money saved masks the amount of bank fees. Also, the money rarely gets applied to the principle at the time of collection. Instead, it is usually collected and accumulated by the company handling your biweekly withdrawal (Are they making money/interest off your money before the apply it to your principle?). You can save more money yourself; keep reading.
Since every dollar counts, it would be better to direct extra money at your current mortgage bills instead of paying some company to help you discipline your money efforts. If you weren’t determined to save money on your mortgage, then you wouldn’t have found this website.
The earlier you can get the payment in, the larger the impact you will have on the overall interest you will pay during the life of the loan. It may sound insignificant, but even an extra $5 lowers the amount total interest amount. Every little bit helps!
Bi-Weekly payments can save large amounts of money during the life of the loan. However, the bi-weekly schedule does not mesh well with most budgets. Even if you (and perhaps your spouse) are paid every two weeks, it can be difficult to bend the budget to match such a schedule. All of your other bills will continue to be due monthly (electric, gas, water, sewer, phone, cable).
Your efforts would be better spent focusing on your monthly budget in order to come up with ways to find extra cash to add to your current months mortgage payment. The sooner the money is applied to the principle, the more money you will save. The only reason not to overpay on your mortgage is if you are carrying higher interest consumer debt (credit cards, etc.). If that is the case, then you should pay them off first.
Option 1: Send in an extra payment each year.
Ring in the New Year by sending in a 13th payment. Setting up an online
savings account is easy. Whenever some extra money is available, direct it to
this account. It may even generate a few dollars in interest during the year.
However, keep in mind that the earlier you can send in extra payments, the
better. See Example #2 Below.
Option 2: Continue to pay monthly, but add the extra as an overpayment each month.
Bi-Weekly payments would add an additional 8.33% per month. Going back to our example, the extra required per month would only be $72.95 per month ($875.36 / 12). Doing this for a whole year (12 times) would add the 13th payment. See Example #3 Below.
Seeing the raw numbers can be a real eye opener, so let's look at some examples. For our examples, we will be using a 30 year fixed rate mortgage of $150,000 at 5.75%. (You can run our Biweekly vs Standard Mortgage Calculator to see how the numbers work out with your own mortgage.)
We are going to run the numbers on the first two years of the mortgage for clarity. The examples will pretend that our mortgage started in January of 2010 and that it is January 2012, two years later. We will do 3 examples for comparison. Numbers speak louder than words!
| Payment | Month | Principal Remaining | Interest | Principal | Monthly Payment | Over Payment | Saved |
|---|---|---|---|---|---|---|---|
| 1 | 01/2010 | $149,843.39 | $718.75 | $156.61 | $875.36 | $0 | $0 |
| 2 | 02/2010 | $149,686.03 | $718.00 | $157.36 | $875.36 | $0 | $0 |
| 3 | 03/2010 | $149,527.92 | $717.25 | $158.11 | $875.36 | $0 | $0 |
| 4 | 04/2010 | $149,369.05 | $716.49 | $158.87 | $875.36 | $0 | $0 |
| 5 | 05/2010 | $149,209.42 | $715.73 | $159.63 | $875.36 | $0 | $0 |
| 6 | 06/2010 | $149,049.02 | $714.96 | $160.40 | $875.36 | $0 | $0 |
| 7 | 07/2010 | $148,887.85 | $714.19 | $161.17 | $875.36 | $0 | $0 |
| 8 | 08/2010 | $148,725.91 | $713.42 | $161.94 | $875.36 | $0 | $0 |
| 9 | 09/2010 | $148,563.19 | $712.64 | $162.72 | $875.36 | $0 | $0 |
| 10 | 10/2010 | $148,399.70 | $711.87 | $163.49 | $875.36 | $0 | $0 |
| 11 | 11/2010 | $148,235.42 | $711.08 | $164.28 | $875.36 | $0 | $0 |
| 12 | 12/2010 | $148,070.35 | $710.29 | $165.07 | $875.36 | $0 | $0 |
| 13 | 01/2011 | $147,904.49 | $709.50 | $165.86 | $875.36 | $0 | $0 |
| 14 | 02/2011 | $147,737.84 | $708.71 | $166.65 | $875.36 | $0 | $0 |
| 15 | 03/2011 | $147,570.39 | $707.91 | $167.45 | $875.36 | $0 | $0 |
| 16 | 04/2011 | $147,402.14 | $707.11 | $168.25 | $875.36 | $0 | $0 |
| 17 | 05/2011 | $147,233.08 | $706.30 | $169.06 | $875.36 | $0 | $0 |
| 18 | 06/2011 | $147,063.21 | $705.49 | $169.87 | $875.36 | $0 | $0 |
| 19 | 07/2011 | $146,892.53 | $704.68 | $170.68 | $875.36 | $0 | $0 |
| 20 | 08/2011 | $146,721.03 | $703.86 | $171.50 | $875.36 | $0 | $0 |
| 21 | 09/2011 | $146,548.71 | $703.04 | $172.32 | $875.36 | $0 | $0 |
| 22 | 10/2011 | $146,375.56 | $702.21 | $173.15 | $875.36 | $0 | $0 |
| 23 | 11/2011 | $146,201.58 | $701.38 | $173.98 | $875.36 | $0 | $0 |
| 24 | 12/2011 | $146,026.77 | $700.55 | $174.81 | $875.36 | $0 | $0 |
In this example (#1), it is January 2012 and have made 24 payments out of our 360 (only 28 more years to go!). Each month we paid $875.36 without any over-payments. If we never overpay, we will pay $165,128.75 in interest during the life of the loan, bringing our total out-of-pocket total to $315,128.75. The Interest column and Principal added together give us our monthly payment. You can see the interest amount slowly decrease and the principal slowly increase. On the first payment, notice how the bank takes a whopping $718.75 and only $156.61 goes towards the principal. The bank takes their money first!
| Payment | Month | Principal Remaining | Interest | Principal | Monthly Payment | Over Payment | Saved |
|---|---|---|---|---|---|---|---|
| 1 | 01/2010 | $149,843.39 | $718.75 | $156.61 | $875.36 | $0 | $0 |
| 2 | 02/2010 | $149,686.03 | $718.00 | $157.36 | $875.36 | $0 | $0 |
| 3 | 03/2010 | $149,527.92 | $717.25 | $158.11 | $875.36 | $0 | $0 |
| 4 | 04/2010 | $149,369.05 | $716.49 | $158.87 | $875.36 | $0 | $0 |
| 5 | 05/2010 | $149,209.42 | $715.73 | $159.63 | $875.36 | $0 | $0 |
| 6 | 06/2010 | $149,049.02 | $714.96 | $160.40 | $875.36 | $0 | $0 |
| 7 | 07/2010 | $148,887.85 | $714.19 | $161.17 | $875.36 | $0 | $0 |
| 8 | 08/2010 | $148,725.91 | $713.42 | $161.94 | $875.36 | $0 | $0 |
| 9 | 09/2010 | $148,563.19 | $712.64 | $162.72 | $875.36 | $0 | $0 |
| 10 | 10/2010 | $148,399.70 | $711.87 | $163.49 | $875.36 | $0 | $0 |
| 11 | 11/2010 | $148,235.42 | $711.08 | $164.28 | $875.36 | $0 | $0 |
| 12 | 12/2010 | $147,194.99 | $710.29 | $165.07 | $875.36 | $875.36 | $3,697.80 |
| 13 | 01/2011 | $147,024.94 | $705.31 | $170.05 | $875.36 | $0 | $0 |
| 14 | 02/2011 | $146,854.07 | $704.49 | $170.87 | $875.36 | $0 | $0 |
| 15 | 03/2011 | $146,682.39 | $703.68 | $171.68 | $875.36 | $0 | $0 |
| 16 | 04/2011 | $146,509.88 | $702.85 | $172.51 | $875.36 | $0 | $0 |
| 17 | 05/2011 | $146,336.55 | $702.03 | $173.33 | $875.36 | $0 | $0 |
| 18 | 06/2011 | $146,162.39 | $701.20 | $174.16 | $875.36 | $0 | $0 |
| 19 | 07/2011 | $145,987.39 | $700.36 | $175.00 | $875.36 | $0 | $0 |
| 20 | 08/2011 | $145,811.55 | $699.52 | $175.84 | $875.36 | $0 | $0 |
| 21 | 09/2011 | $145,634.87 | $698.68 | $176.68 | $875.36 | $0 | $0 |
| 22 | 10/2011 | $145,457.34 | $697.83 | $177.53 | $875.36 | $0 | $0 |
| 23 | 11/2011 | $145,278.96 | $696.98 | $178.38 | $875.36 | $0 | $0 |
| 24 | 12/2011 | $144,224.37 | $696.13 | $179.23 | $875.36 | $875.36 | $3,340.74 |
In example (#2), it is January 2012 and have made 24 payments, just like the first example. However, we sent in an extra payment at the end of each year. The first over payment of $875.36 wound up cancelling $3,697.80 in interest charges. Likewise, our second overpayment saved us $3,340.74. By overpaying only $1750.72, we canceled $7,034.54 in future interest charges. Not only that, but our total payment dropped from 360 months to 350 months. This action eliminated 10 months of future mortgage payments! Who wants to give the bank the bad news?
| Payment | Month | Principal Remaining | Interest | Principal | Monthly Payment | Over Payment | Saved |
|---|---|---|---|---|---|---|---|
| 1 | 01/2010 | $149,770.44 | $718.75 | $156.61 | $875.36 | $72.95 | $332.92 |
| 2 | 02/2010 | $149,539.78 | $717.65 | $157.71 | $875.36 | $72.95 | $330.97 |
| 3 | 03/2010 | $149,308.01 | $716.54 | $158.82 | $875.36 | $72.95 | $327.38 |
| 4 | 04/2010 | $149,075.13 | $715.43 | $159.93 | $875.36 | $72.95 | $325.06 |
| 5 | 05/2010 | $148,841.14 | $714.32 | $161.04 | $875.36 | $72.95 | $321.91 |
| 6 | 06/2010 | $148,606.03 | $713.20 | $162.16 | $875.36 | $72.95 | $319.43 |
| 7 | 07/2010 | $148,369.79 | $712.07 | $163.29 | $875.36 | $72.95 | $316.98 |
| 8 | 08/2010 | $148,132.42 | $710.94 | $164.42 | $875.36 | $72.95 | $313.64 |
| 9 | 09/2010 | $147,893.91 | $709.80 | $165.56 | $875.36 | $72.95 | $311.90 |
| 10 | 10/2010 | $147,654.26 | $708.66 | $166.70 | $875.36 | $72.95 | $308.39 |
| 11 | 11/2010 | $147,413.46 | $707.51 | $167.85 | $875.36 | $72.95 | $306.71 |
| 12 | 12/2010 | $147,171.51 | $706.36 | $169.00 | $875.36 | $72.95 | $303.11 |
| 13 | 01/2011 | $146,928.40 | $705.20 | $170.16 | $875.36 | $72.95 | $301.51 |
| 14 | 02/2011 | $146,684.12 | $704.03 | $171.33 | $875.36 | $72.95 | $298.41 |
| 15 | 03/2011 | $146,438.67 | $702.86 | $172.50 | $875.36 | $72.95 | $295.81 |
| 16 | 04/2011 | $146,192.05 | $701.69 | $173.67 | $875.36 | $72.95 | $293.93 |
| 17 | 05/2011 | $145,944.24 | $700.50 | $174.86 | $875.36 | $72.95 | $290.22 |
| 18 | 06/2011 | $145,695.25 | $699.32 | $176.04 | $875.36 | $72.95 | $289.01 |
| 19 | 07/2011 | $145,445.06 | $698.12 | $177.24 | $875.36 | $72.95 | $286.29 |
| 20 | 08/2011 | $145,193.67 | $696.92 | $178.44 | $875.36 | $72.95 | $283.39 |
| 21 | 09/2011 | $144,941.08 | $695.72 | $179.64 | $875.36 | $72.95 | $281.64 |
| 22 | 10/2011 | $144,687.28 | $694.51 | $180.85 | $875.36 | $72.95 | $278.77 |
| 23 | 11/2011 | $144,432.26 | $693.29 | $182.07 | $875.36 | $72.95 | $276.87 |
| 24 | 12/2011 | $144,176.02 | $692.07 | $183.29 | $875.36 | $72.95 | $274.17 |
Example (#3) is just like example 2, with a twist. Instead of sending a yearly overpayment, we slice the over payments into bite-sized monthly overages. If we do this, each month requires a $72.95 over-payment (875.36 / 12). This method saves us even more! Why? Because the money is applied to the mortgage earlier. The earlier an overpayment is applied, the bigger the impact. Example #3 saves us $7,265.52, while Example #2 saved $7,034.54. We still overpaid about the same amount, $1750.80, but saved an additional $230.98! And the bank still must part ways 10 months early, because the total number of payments was lowered to 350 months.