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Bi-Monthly Mortgage Payments: The Real Deal

What is the deal with a bi-monthly mortgage payment plan anyway?

If you have a mortgage, chances are you've received a "money-saving offer" to convert your amortization into a bi-monthly payment plan. Every time I've seen one of these offers, there has been a charge of around $300 for the conversion. This bi-monthly offer is just another way for banks to scam consumers as far as I am concerned. I would strongly recommend that you do not sign up for bi-monthly mortgage payments, even if your mortgage company does not charge you.

Do bi-monthly mortgage payments really save you money?

Yes! Absolutely! If your mortgage payment is $2000 per month, but you make two $1000 bi-monthly payments instead, you will pay off your mortgage sooner and you will save a small fortune in interest. Is this some kind of finance magic? It just doesn't seem to make sense!

There is no mystery; here's how it works: There are 52 weeks in a year. If you make bi-monthly payments, you are actually being billed every two weeks- not really twice monthly. That amounts to 26 half-payments in one year. Twenty-six half-payments would equal 13 full mortgage payments.

So the bottom line is that you are essentially making one extra mortgage payment each year if you pay bi-monthly. That's it. No big mystery. No financial magic. You are just paying down your principal faster, which reduces the interest that you pay on said principal. "Bi-monthly" is a misnomer.

All you have to do is make one extra payment per year and you will achieve the same results as if you converted to a bi-monthly plan. Do you really need to pay $300 for this? You can send in one extra payment per year and you don't have to fork out three hundred bucks for the privilege.

Or, you can send in a little extra each month. For example, if your payment is $1200 per month, you could send in an extra hundred bucks each month. One hundred extra dollars multiplied by 12 is $1200, right? Sending in $1300 each month would be the same thing as sending in a bi-weekly payment or paying once extra each year.

However, if you really like the idea of paying once every two weeks instead of making the extra payment, go ahead and send your mortgage company a check every two weeks. Nobody is going to stop you. I promise, your mortgage company will deposit your check even though you aren't on the bi-monthly plan.

How much can one extra payment per year save you?

If you owe $200,000 and your interest rate is 6.5%, you will pay $231,677 in interest, plus the $200,000 thumbs up principal, for a grand total of $431,677.

If you make one extra payment per year, paying down your principal faster, you will save over $52,000! Your new total payment will be $379,292.

Of course, if your interest rate is higher than 6.5% and / or you owe more than $200,000- your savings are even more dramatic.

Personally, I send in a double-payment each month. By sending in double, my 30-year mortgage gets paid off in about ten years. My own interest savings will amount to about $250,000!

If business slows down, I'll have to slow down my fast pay-back. But I am not locked into anything. I can send in one extra payment per year or I can continue send in double. I am certainly not going to get locked into a bi-monthly payment plan and have to pay for the inconvenience on top of it! That's just ridiculous.

Posted by Michael and Karen George on 04/16/2007 01:02 PM

Comments (19)

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19 Comments on Bi-Monthly Mortgage Payments: The Real Deal

APR

2007

I have never seen a lender charge for this. Maybe this is just another example that loans differ across the country. I pay my mortgage online and there's always the button to click on the bi-monthly and there's no charge. I did it for a while on my previous house. On the current house, I rather have the interest to write off instead of paying the principal down and paying less interest.

Karen good post. Have to say I have never seen a mortgage lender charge for a bi-weekly payment. Your post is exactly right on how it works. However, if the person has a loan through World savings (now Wachovia) and they switch to a bi-weekly this will save the person a lot more because they are the only lender that does a true bi-weekly payment. They will post the payment every time not wait until the entire payment is made.

Hmmmm... Maybe I'll take out the part about charging. Is this just an Arizona thing?

Not sure Karen I can only speak for the east coast.

Karen, you need to learn to not attack people's comments. Yes, it does make sense. If you're making a regular mortgage payment and the principal payment each month is ONLY $100, how does it make sense to pay an extra mortgage payment of say $1500 to reduce the principal by $102 instead of $100. Each month, all you save is an extra dollar or two. I did it on my last house. I kept a spreadsheet of every single payment and had side by side what the principal balances were with normal payments and what it was with extra payments. In 3 years, the principal payment each month only changes a dollor or two. By the end of three years, about $130 was going towards principal each month instead of $100. YES, it makes more sense with this situation to get more of a tax deduction.

Now, if your principal payments are significantly higher because you've already got quite a bit of equity in your home, it might make sense, but not when you first created your mortgage and you're spending the first 7 years paying mostly interest.

Karen - great information - thanks - I can always count on you

Karen, no you're not understanding what I said, though I see your post stating that has been deleted.

Yes, I understand that if you made a $1500 principal payment to reduce the principal, that of course your principal is actually reduced that $1500. However, when your next mortgage payment is due and they give you the break down of what is going towards principal verse interest verse taxes and insurance, the principal payment that next month might be at $102 instead of $100 because you previously knocked out $1500 of the principal. So, in essence, you're not really saving too much just because you paid down the principal $1500.

And yes, I understand that if you make just one extra payment a year, you can actually wipe out 7 years of interest, but when the average person is not in their home for 30 years, it doesn't make sense to do that anymore.

Karen,

Thanks for the information. In my particular circumstance, it's sensible to pay only the minimum payment due each month, but I will keep this in mind for the future.

Fran

APR

2007

Donna-- I am still not understanding, but I apologize if I was rude to you yesterday regarding your comment. I was in a killer mood and I took it out on you and anyone else who was within my sight. My most sincere apologies.

APR

2007

Karen...first off, excellent post and very well explained. I am lost on what comments were said. And I am semi lost on what Donna is trying to say.

Overall, you do save money. I will agree that you shouldn't pay down your mortgage as quickly as people once did in the 80's and 90's. But Donna, all you talk about it losing the interest that you can claim, if you pay down quicker. That's just the small piece of the pie. The main reason, in my opinion, is that you can get a much better return on that extra money, outside of paying your mortgage down. Especially if you have rates less than 7%. There are financial plans that can make you more on the money, hence why one shouldn't worry about paying down so soon. It's called financial planning.

In regards to the set up fee.... it's not just an Arizona thing. It's national, just that not every lender charges this. But many do... and so does World Savings. The best point that you made and that I make often. Why strap yourself into something that you have to do, when you can do it yourself. Especially if your finances change on you. Very big point and again, I state this every time.

jeff belonger

Karen - good points...

I don't have that same philosophy - I'm not a pay your house off early type of guy but you make a strong argument!

I know Jeff. It seems like some people don't understand this concept. I don't want to argue with folks...because I think I hurt feelings sometimes... But, boy, I am confused.

APR

2007

The only thing that I would add would be to always make a note in the memo portion of the check that the extra amount being paid is to go towards principal, not interest. Most lenders will automatically apply any extra payments towards principal, but some don't. If you put it in the memo portion of your check, you have a paper trail to prove your intentions.

R.B. "Bob" Mitchell

ValueList Real Estate Services, Inc.

APR

2007

Thanks for your post, as a mortgage professional, I have to disagree with your philosophy. I am not going to argue, but suggest that you read Missed Fortune 101 by Douglas Andrew. It may give you a new perspective on counseling your clients.

APR

2007

David- thanks for the book recommendation, but which philosophy do you not agree with?

Bi weekly payments in general. If you were to put that extra payment into a mutual fund and gain interest on it, you would be able to cut the time down to paying off the liens even further. Since the amortization schedule is set at the begining of your loan, paying extra principal does not decrease the amount of interest you are paying each year, but by putting the money into a mutual fund every two weeks, getting the return from the investment, that principal will grow and in the space of 12-17 years depending on how the investment does, you can pay off the entire balance. I still don't recommend paying off the principal either, but that is a tax discussion and I don't want to get into that right now... read Mr Andrews book and extrapolate his mortgage philosophy, it is a terrific read.

APR

2007

Karen, a lot of lenders....or actually companies.....offer bi-weekly payments at a charge. I'm not sure what it is but it's a few dollars per month. As you point out, there's absolutely no reason to pay to have that set up. There are 2 popular ways to achieve the same thing:

1. Pay an extra month of mortgage each year.

2. Add 1/12th of your mortgage to your monthly payment.

Simple.

Thanks for sharing!

- Tchaka

APR

2008

I just wanted to mention that Wachovia is not the only lender who does true biweekly payments.

AUG

For clarification the article is talking about bi-weekly payments and not bi-monthly. It is important to distinguish between bi-weekly and semi-monthly, these are two very different things.

What you choose may also depend on how you are paid, if your payroll is monthly or semi-monthly you will probably want to go with monthly payments, if your payroll is weekly or bi-weekly then bi-weekly payments may make sense.

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Bi-Monthly Mortgage Payments: The Real Deal

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