What is a biweekly mortgage, and why would I want one?
Borrowers usually pay mortgages monthly. However, when your debt is a biweekly loan, you must pay every other week.
The reason why you might want to pay a loan every other week is that you'll save on interest charges over its term. Additionally, while you'll naturally make more payments with a biweekly loan, the loan will be paid-in-full sooner than with a monthly payment plan.
Why is that?
Let's do the arithmetic! Don't worry; it's elementary!
The payment amount for a biweekly mortgage is one-half the monthly amount. Since there are 52 weeks in a year, you'll make 26 regular payments when paying every other week. That's the same as making 13 monthly payments.
To put some numbers on this, if the monthly payment is $2,000, the mortgage holder will pay $24,000 a year when paying monthly. Or when paying biweekly, they'll pay $26,000 ($2,000 / 2 = $1,000 * 26 = $26,000) a year.
So the mortgage holder is paying more per year (the amount equal to one monthly payment), and the benefit to them for doing so is they'll be debt free sooner and the total interest paid will be lower.
How much will you save?
This calculator will tell you precisely that. More details below
Monthly vs. Biweekly Payment
Without a doubt, an accelerated biweekly mortgage will save you money vs. a monthly mortgage. As the above illustration show, it's a mathematical certainty.
But, no matter how you slice it, monthly or biweekly, mortgages are significant investments for most of us. Over the term of the loan, the total interest charges at a 5% interest rate will exceed 60% of the original loan amount.
For a $325,000 loan, total interest comes to more than $300,000 for the monthly option and $247,000 for the biweekly option. Sure, saving more than $50,000 with the biweekly option is excellent, but $247,000 is still a lot!
Can anything be done to reduce the loan costs any further?
Perhaps there is.
Biweekly Mortgage Calculator with Extra Payments
If you have the available cash flow, you can make extra payments which are used to reduce the loan balance. When you decrease the amount owed, you lower the amount of interest due. Doing this is called prepaying principal.
Even making one extra payment will save you interest. This calculator supports both lump sum or one-time extra payments as well as a series of additional payments.
To see how much you'll save, you may apply the extra payment to either the monthly loan or the biweekly loan, or both. The idea here is, you may want to compare a debt paid biweekly without additional payments to a debt paid monthly, where you do plan to make extra payments.
Or you may want to see how much the biweekly loan will save over the conventional loan when you add extra payments to get an additional saving boost.
Note: In keeping with the theme of this calculator, the extra payment for the biweekly loan will be 1/2 the amount you enter. This is an intentional design feature, not a bug!
A biweekly loan will save you money.
A biweekly loan and making extra payments will save you even more money.
But is doing either the right, long term, financial strategy?
Forgone Opportunity Costs - They Could Cost You!
At the top of this post, when explaining how a biweekly payment loan works and how it saves interest charges, I showed you some simple arithmetic. In the example, if you, the borrower, elects to pay every other week, you'll pay $2,000 more per year than if you make 12 monthly payments.
You should ask yourself, what else could you be doing with the $2,000?
Could you be investing it?
If you make biweekly payments, you lose the opportunity to invest them. Not being able to save and invest is a forgone opportunity. It does not come back.
The question then is, if you invested the $2,000, how much would it earn over the term of the biweekly loan? Would you gain more than you expect to save interest charges?
Several calculators on this site will answer these questions for you. This Savings Calculator is a good place to start.
What you want to know is what will be the future value of $2,000 invested every year for the next 22 years or so (typically the term of the biweekly loan at today's interest rates). If the future value is more than that amount you save in interest, then perhaps you should not take out a biweekly mortgage?
Remember though, there are usually risks to investing, while the interest saved with a biweekly mortgage or loan is a mathematical certainty.
If you are like me, you'll get tired of staring at columns of numbers. That's where charts come into play. Take a look at the recently updated charts to get a quick summary of all the details you'll find in the amortization schedules.
This calculator includes six of them.
If you are a blogger, feel free to export () any of the charts you create and to post them on your site to help prove your point!
What do you think?
Is a biweekly loan for you? As always, leave your comments or questions below. Feel free to tell me what you need.
Enter non zero values for any 3 of the primary loan variables: "Loan Amount," "Total Months," "Annual Interest Rate," or "Regular Monthly Payment." Enter a "0" (zero) for the one unknown value.
The calculator will calculate the unknown. It will also calculate the "biweekly payment amount" (half the monthly payment amount), the total interest due when paying the debt with monthly payments and the total interest when paying with biweekly payments. Finally, it will calculate the interest saved as a result of paying with biweekly payments.
The calculator will sum the extra payment amounts too.
Biweekly Calculator with Amortization Schedule
The calculator's default behavior merges the monthly payment schedule with the biweekly schedule. The merged payment schedule allows you to see the running interest paid at the end of each year for both loan options. You can also see the loan balance for each method at any point during the payback period.
However, under "Options," you'll find a new feature that lets you create independent (non-merged), amortization schedules for either the monthly or the biweekly loan. When you select an individual payment schedule, the calculator enables you to set the loan date and first payment date as well as other loan options.
It is not necessary to click on the "Calc" button before clicking on the "Payment Schedule" button.
You should note that changing either the "Long Period Options" or "Short Period Options" may impact how interest gets charged for the days between the loan date and first payment date.
View the charts to compare the two cash flows visually.