The biweekly payment system is a highly publicized way for people to save money on their mortgage. The math is simple and will be explained below, but there are some things you should know before you decide to enact this plan. First, although it is true that you will save money in the long run (and it could be a lot of money) due to not having to pay as much interest on your loan, this biweekly payment system effectively causes you to make one extra mortgage payment each year. Therefore, if you are extremely strapped for cash, this plan may not be the best idea for you. Second, this plan assumes that the house upon which you enact this plan is going to be the house that you are going live in for a long time. Therefore, if you are looking at investment properties or some other short term ownership situation, this plan is not for you.
As stated above, the math is fairly simple. Basically, by enacting this plan you will be making one extra mortgage payment per year. Over the life of your loan, this could save you literally thousands of dollars in interest payments. This occurs because you pay your loan of sooner. The example I am going to use is going to consist of very simple numbers. Keep in mind that everything is proportionate and therefore, if your principle mortgage amount is higher, your payments will obviously be higher.
Let us assume that you have a mortgage and that your monthly payment is $1,000 (inclusive of principle, interest, taxes, and insurance). Obviously, if this inclusive payment is $1,000 per month, your principle mortgage amount is not that large. Back to the point; if your mortgage payment is $1,000 per month, you will pay $12,000 per year towards your mortgage (including principle, interest, taxes, and insurance). However, because of the interest rate and other elements, the principle mortgage amount will barely decrease. The bottom line is, if you pay monthly, you will have paid $12,000 per year.
On the other hand, you can pay biweekly. Biweekly means that you pay your mortgage every two weeks. Keep in mind that this does not mean that you pay the full mortgage payment every two weeks. If such was the case, you would have to pay $24,000 per year (in our example) and probably could not financially survive in such a situation. When you pay on a biweekly schedule, you cut your mortgage payment in half. Therefore, using our example, you would pay $500 every two weeks. You may be thinking that since there are about four weeks in a month that the math should equal out. However, since there are almost never exactly four weeks in month, the math comes out differently.
There are 52 weeks in one calendar year. However, because you will be paying biweekly, we have to divide those 52 weeks by 2. Therefore, we are left with 26 weeks. Therefore, if we pay $500 biweekly, we multiply 26 by $500. This equals total yearly payments of $13,000. Therefore, you have made an additional payment for the year.
The theory behind this kind of payment schedule is that you will not even notice the extra payment because the biweekly system will become a habit for you. However, it is important to note that you have to notify your lender that you are going to be doing this payment plan or else your payments will continue to come on a monthly basis.
The choice is up to you. Analyze your situation and you intentions with the property in which you live and decide if such a plan is right for you.