Many people have enrolled in a bi-weekly payments program as a means to pay off their mortgage faster. Paying your mortgage payment every 2 weeks as opposed to each month does save you money. Over the life of a 30 year $150,000 mortgage at 4%, it will pay off your mortgage 4 years faster, saving approximately $17,000 in the process.
How Do Bi-Monthly Mortgage Payments Work?
By making half payments every 2 weeks, you wind up making 13 full mortgage payments (52/2=26/2=13) in one year. By making 13 payments per year, the extra payment creates the long term savings.
Potential Pitfalls
Many mortgage servicers do not allow for bi-weekly payments, meaning they will accept your money early, hold onto your first payment until the 2nd payment arrives before posting, negating any timing benefits of paying your payment early. By this method, you won’t get the benefit of the extra payment per year until the end of the year.
Further, not only are you not getting the benefit of paying early, if you have enrolled in a bi-weekly payment servicer, you are getting charged a fee to have very little benefit.
How to Avoid Pitfalls
Rather than making your mortgage payment every 2 weeks, just add 1/12 of your mortgage payment to your existing payment. You will actually pay off your mortgage a little faster by doing so because the extra funds are applied to your mortgage balance earlier as opposed to later in the year.
To Conclude, Bi-Weekly payment plans do work in some cases, but due to mortgage servicing limitations, it is much easier to just add a little extra to your monthly payment.