You might have already heard that biweekly payments can seriously help you to pay off your mortgage faster, but do you understand how they work? You could pay a company huge fees to show you, or you could take a moment to see how they work for yourself.
After all, it’s your money so learning to take control of it yourself will be the best thing you ever did for yourself. You’ll find that it’s easier to budget each week and you’ll notice your mortgage balance reducing faster than you thought by simply doing one small thing a bit differently.
How Biweekly Payments Are Calculated
Grab your mortgage statement and check how much your minimum payment is each month. This is the ‘amortized’ payment, which was calculated by the bank to pay back a bit of your balance and a lot of their interest.
This figure is also the minimum possible payment you need to make in order to make your mortgage stretch out for the longest possible period of time. If you pay only the minimum amount once a month, then you will pay out your mortgage balance only at the very end of the full loan term.
Let’s cut down some of the bank’s profits and re-calculate this payment so it’s in your favor instead of theirs.
Here’s an example of a biweekly mortgage payment calculation:
If your mortgage payment was $1,000 per month, then by the end of the year you’ll pay exactly 12 payments over that time. This adds up to $12,000. Simple, right?
No matter what your mortgage payment is, divide it by 2. If your monthly payment is $1,000, then you’ll divide this by two and end up with a biweekly figure of $500. This means you’re going to pay half your mortgage payment every second week on the same day.
What is Biweekly?
Biweekly simply means ‘every 14 days’ and is the same period of time as fortnightly. It does NOT mean twice a month. It means that if you get paid every second Thursday, then you make your newly calculated payment on every second Thursday.
This is an important distinction to make.
How Do Biweekly Payments Reduce Your Mortgage?
If you only make your new biweekly mortgage payment twice a month, then by the end of the year you would have made 24 half-payments, which is exactly the same as 12 monthly payments. You’re having no effect on paying off your mortgage at all.
However, if you pay your new biweekly mortgage payment on the same day every second week, then by the end of the year you would have made 26 payments instead of 24.
This puts you one entire payment ahead every year.
What Else Can Biweekly Mortgage Payments Do For You?
On top of being ahead on your mortgage all the time, you’re also able to reduce the amount of interest you’re being charged on your loan. When banks calculate your interest charges, they work out how much interest you owe them based on your mortgage’s balance at midnight EVERY day.
Then they add up what they’ve charged you and show you one simple figure at the end of the month.
By paying biweekly, your balance actually drops by that little bit of money every 14 days. This reduces the balance, which in turn reduces the amount of interest the bank can charge you at the end of the month.
