How to Save Thousands on Your Mortgage
A bi-weekly mortgage saves you thousands of dollars in interest expense over the loan term. You amortize your loan faster, shortening the time it takes before you own your home outright.
Instead of monthly payments, bi-weekly mortgages require a loan payment every two weeks. For example, you might pay $500 every two weeks instead of $1,000 a month. As a result, you make 26 payments in a year. If your bi-weekly payment equals half your monthly payment, this is equivalent to making 13 monthly payments.
You aren't limited to making bi-weekly payments that equal half the amount of a monthly payment. Most lenders offering bi-weekly mortgages will negotiate the size of the payment.
A bi-weekly mortgage does not have the same term as a 15-year mortgage loan. From the table below, you can see that your loan term is still well above 15 years.
The chart shows the monthly P+I payments for a $100,000 fixed-rate loan for 30 years. If you make bi-weekly payments of $316 on a 6.5% loan, you see that you pay off the loan in about 24.2 years. This is almost six years sooner than if you were to make monthly payments for 30 years. The bi-weekly payments would save about $29,100 in interest over the loan term.
| $100,000 (30-year fixed rate) |
6.5% | 7.0% | 7.5% | 8.0% |
| Monthly payment |
$632 | $665 | $699 | $734 |
| Repayment period (years) |
30 | 30 | 30 | 30 |
| Bi-weekly payments |
$316 | $333 | $350 | $367 |
| Modified repayment period (years) |
24.2 | 23.7 | 23.2 | 22.8 |
| Interest savings |
$29,100 | $34,200 | $40,240 | $46,240 |
Note: months are calculated as a decimal value. Interest savings are approximate and equal the difference in total payments for principal and interest.
The table shows that your interest savings grow as the loan rate increases. The repayment period also gets shorter as the loan rate increases.
You don't have to use a bi-weekly mortgage to make extra loan payments. You can make them whenever, and for however much, you wish, provided your lender does not charge a prepayment penalty.
Using a bi-weekly mortgage or making extra payments has an opportunity cost. Because you pay less interest, the amount of your mortgage interest tax deduction is smaller. Moreover, you'll have to give up any interest that you might earn on the extra amount of payments you need.
Using a bi-weekly mortgage or making extra payments has an opportunity cost. Because you pay less interest, the amount of your mortgage interest tax deduction is smaller. Moreover, you'll have to give up any interest that you might earn on the extra amount of payments you need.
2008-06-09 15:25:59
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