How to reduce the loan interest with a biweekly mortgage payment plan

What are biweekly payment plans?

The biweekly payment plan is another way to reduce the total interest that you will pay over the life of your loan (and, consequently, reduce the term of your loan). The purpose of the plan is money management. If your payday is every other week, you make your payment before you have a chance to spend the money on other things. For many borrowers, paying extra on payday is easier than putting that money aside to make an additional principal payment once a month.

The plan sounds simple. You pay half your monthly payment every two weeks. Since there are more than twenty-eight days in all months except February, you are paying a little extra. If your payment is US Dollars 1,000 per month, for example, you would make the required payment of US Dollars 12,000 per year. If you paid half the monthly payment every two weeks, you would pay US Dollars 500 times 26, for a total of US Dollars 13,000 per year.

For those with little financial discipline, a biweekly payment plan is easier than paying the required monthly payment.

The results are surprising. On a US Dollars 100,000 loan for thirty years at 7% interest, you will save over US Dollars 34,000 in interest over the life of the loan and pay it off over six years sooner. Sounds good so far. The problems are in the mechanics of applying the extra money. There are three common ways that lenders apply the extra money paid.

The extra money is credited to principal every two weeks. This is the true biweekly payment plan and will give the results previously described.
The extra money is held in an account and credited to principal once a month. This is the standard (sometimes called pseudo) plan. Over the life of the loan previously described, the standard plan will cost the borrower about US Dollars 2,000 and increase the term by four months over the true plan.
The third method is to hold the money in an account and apply it to principal once a year. This will be even less advantageous to the borrower. If this is the plan offered, find another lender.

Biweekly plans should be arranged directly with the lender. If you are getting a new loan, this is a simple matter. Ask if the lender offers a biweekly plan and how the extra money is applied. Most lenders do not offer such a payment plan. It is simply not to their advantage. If your lender does not accept biweekly payments or you already have an existing mortgage, it is more difficult. Few lenders offer a way to switch over to a true biweekly plan. The best option you are likely to get will be that you can send in half your monthly payment every two weeks and the extra money will be applied once a month.

Beware of companies that offer to change you to a biweekly plan. If your lender will not give you a biweekly payment plan, another lender will not be able to get your lender to give you a biweekly payment plan. What these companies do is collect the biweekly payment from you and send it to your lender monthly as an additional principal payment. Some even keep the extra money and make the additional payment once a year. On top of drawing interest on your money while they are holding it, they charge you a fee for their service.

A better way to do this is to do it yourself. Arrange with your lender to have your payment taken directly from your bank account. Deposit half your monthly payment into the account every two weeks. At the end of each month, send the extra money to the lender as an additional principal payment. You can ask the lender to automatically withdraw the extra money from your account each month, but it probably will not agree to do it.

The difference, of course, between doing it yourself and having a company do it for you is discipline. If you get a bill every two weeks from the company handling the payment for you, you will pay it. If you do not have to put that extra money into your account, it will take more discipline to do it. If you had that little financial discipline, you would not be looking into buying a home and getting the best loan. Discussing fixed rate loans versus adjustable rate loans in a general way is easy. It becomes more difficult when you get down to specifics. You will have many choices of both fixed and adjustable rate loans.

If you intend to pay on your loan for ten years or more, a fixed rate, biweekly payment mortgage is definitely the best loan you can get. If you intend to sell within ten years, there is less of an advantage. If you intend to sell within five years, an adjustable rate loan will usually be better for you.

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