How does the Bi-Weekly Mortgage Payment Plan work? I get asked how this program works all the time. This is a great plan to show your clients how they can pay off their home about 6 years earlier and save over 23% of the interest on a loan just by using the same mortgage payment, in fact this payment plan is something everyone should be using on their mortgage.
So how does it work? It is pretty simple. Take a look at the chart below. Take a $417k mortgage at 6% over 30 years, the payment is $2500. Rather than paying your bank the regular mortgage payment of $2500 every month, you’d pay $1250 every two weeks. In other words you pay the bank half of your monthly mortgage bill every 14 days.
When you pay your mortgage monthly, you make a total of 12 payments per year. There are 52 weeks in the year. So that means by paying every other week you make 26 half payments, or the equivalent of 13 full mortgage payments per year. By doing so, you end up making one extra monthly payment per year (that is the secret).
In this example, a homeowner with a $417k loan amount at 6% interest on a 30 year fixed loan, will save $103,755 in interest over the term of his loan and payoff his home in just over 24 years. The total savings of $103,755 is over 23% of the interest on the loan!
What if I can’t pay biweekly?
Another question that always pops up is, “What if I pay my mortgage on the 15th and the 30th of the month, will this plan still work? This will not have the same effect as the bi weekly plan. It is effectively the same as paying your mortgage once a month, because you are just paying the bank the same amount of money every 30 days.
Of course some people only get paid once a month or twice a month, so making bi weekly payments may not work for them financially. Here are the other two ways to make the biweekly plan work without having to make biweekly payments.
1. If you do want to prepay your mortgage, you can achieve the same results by adding the equivalent of 1/12 of a month’s mortgage bill to your regular monthly payments.
2. Or lets say at tax time you get a nice refund, you can use some of your refund to apply one full month’s payment directly to principle once a year. Remember the secret to the bi weekly plan is that you are making one full extra payment to principle every year.
Homeowners can now control the rate of interest!
On the above example, because the homeowner eliminated over 23% of the interest on their loan, they dropped their effective rate of interest from 6% down to 4.9%. At some point over the next few years, rates will rise to 6%, so this is a great program that will help buyers deal with the shock of higher interest rates. This will also be a great selling tool to present to buyers in the near future, as it will allow all homeowners to control the rate of interest they will pay back on a loan and not be so concerned that rates are higher. As there are limited buyers out there these days, we all need as many tools as possible these days to give ourselves an edge.
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