Mortgage payments - any difference between bi-monthly and monthly payment?

Factual Questions
1

Here’s the question. I know that if I have a 30 year mortgage, paying bi-monthly (or every 2 weeks, which works out to 26 payments a year) will pay down my loan more quickly than if I just pay once a month.

Let’s use some numbers to make this easier to visualize. (this is a hypothetical to make things easier, apologies if some think this is too easy) :slight_smile:

Let’s say my mortgage is $1200/year. This equates to $100/month (or 12 equal payments of $100 each). If I choose the bi-weekly option, I pay $50/14 days, (or 26 equal payments of $50, which would equal $1300/year.

So, when I’m paying $1300 instead of $1200/year, the principle is getting paid down more quickly over time since I’m hitting the balance every 14 days instead of every 30-31 days. Net Present Value and all that. I believe this significantly reduces the number of years of a loan, from 30 to 24 -25 years based on the bi-weekly payments.

However, what if instead of paying bi-weekly, I divide the extra monthly payment over the course of the year, so each month I would pay $100/month + $100/12, or $108.33/month. At the end of the year, my output toward my mortgage would be the same ($1300). However, would the mortgages be paid off at the same time? Or would paying bi-weekly still make sense since I’m hitting the principle more quickly each month (with less money, of course, but still 15 days earlier than the monthly payment.

My January payments look like this: $50 paid on the 14th, $50 paid on the 28th or $108.33 on Jan 31st.

I’ve talked to a few people about this. Some say paying it bi-weekly is the better way to go, and will reduce your principle faster. Others say it is a wash and I will be paying the same length of time over the life of the loan. Which is the correct answer? If they are both the same, then why do banks advertise the option of paying bi-weekly in the first place? Why not just point out the additional 1/12th payment/month and do away with the bi-weekly option?

SFP
(boy, that sounds convoluted. It’s really not. Sorry for the description. Hopefully, if you have ever had a mortgage, it will make sense.)

2

Here’s a better way. Take out a 30 year fixed mortgage with no pre-payment penalty. From the start, double the amount of principle that is part of the payment. The principle portion is very small at the start of the mortgage. It increases as the loan gets paid off. Yet, with inflation and raises you should be able to afford the gradually increasing double principle payments. If you stick to it the mortgage will be paid off in 15 years. If you get strapped you can always just make the required lower payment.

3

Have you looked for bimonthly mortgage calculators?

4

I think the idea of a biweekly payment is that you “trick yourself” into making an additional payment towards your mortgage every year. Most of the shortening of your mortgage is due to the additional payment, not due to the particular way the payments are arranged.

That being said, if you have an additional $100 to put towards your mortgage in a given year, the best way to do it is pay it at the start of the year. The worst way is to pay it at the end of the year. The difference between those two cases is that if you pay at the end of the year, your debt has increased by one year’s interest on that $100, while if you pay at the start of the year it hasn’t. Every other allocation of that payment gives you something in between.

5

This doesn’t really make sense. If you have an additional $100, it is better to pay it sooner rather than later. But it doesn’t matter what time of year it is.

6

Try a mortgage scenario calculator - plugging in a $300K 30 year home loan into this one with the only difference being fortnightly vs monthly repayments, the fortnightly one will shave 2 months off your home loan (29 yr 11 mo vs 30 yr 1 mo) and save close to 4K over the 30 year term.

7

Everybody has explained things pretty adequately, but let me specifically mention:

There are 2 ways banks benefit:
1: Often they are charging $300 to set up automated bi-monthly billing for you
2: With your bi-monthly payment, there is an obscure way they can hold on the money for a few extra days and make a little interest on the float between when you pay and they actually deposit. It doesn’t come out of your pocket but it’s effort-free income for them.

8

Depends how interest is calculated. If you are calculating interest daily, then great - Pay a bit of it 2 weeks earlier, and save 2 weeks’ worth of interest.

If you pay $50 in the middle of the month (to simplify things, rather than 2 weeks) then each month you save yourself 15 days (approx) of interest on $50 compared to monthly payments. That’s $600 for 15 days, or interest on $300 for a month, or on $25 for a year (at 6% that’s $1.50) . It may not sound like much, but your mortgage is probably bigger than $100/m, compounding sets in So that’s $1.50 that you save 25 years of interest on too, and as mentioned, you also pay down even faster if it is a bi-weekly payment.

Of course, if the bank charges interest monthly based on the highest balance over the month, you aren’t saving money on interest, you are just handing them a bit more free money - as if they are not gouging you enough. ($300 to set up a payment plan??? Huh? When the cable company or city tax department does it they do it for free…)

9

Many people are paid biweekly so it is easy to budget if you have the same amount taken out of your paycheck everytime you get one.

10

Yeah, doubling your payment will lead to a payoff period much sooner than 15 years. Bankrate puts it at 25 years and 3 months sooner on a 30 year mortgage.

11

Not doubling the payment, doubling the principle. So for instance if your mortgage payment is $1000/mo initially it might be something like $200 principle and $800 interest. Later in the life of the mortgage these numbers will be reversed. The idea is to double the amount you’re paying in principle each month, so you might pay $1200 at first and then as things progress you’re gradually approaching $2000 at the end.

12

o i c

13

That’s the main reason that I have always made fortnightly mortgage repayments.

14

Semantics derail, but wouldn’t a “bi-monthly” payment mean one payment every two months? If you’re paying twice a month, that would be a semi-monthly payment, not bi-monthly.

15

Yes but in the OP he uses the terms interchangeably.

16

I’m sure he meant biweekly. Semi-monthly payments wouldn’t have any benefit.

17

I’ve never gotten past the fact that, for at least two months in a year, I’d be stuck making three payments in a month. Two half payments a month isn’t much of a change. Three half payment is playing chicken with my budget. I’m paid twice a month, not every two weeks.

So when my house was devalued, I didn’t drop the payment quite down to the new monthly amount. But I don’t take the bank up on their offers of payments every two weeks. Just in case.

18

And that’s the difference.

At least in the US, the vast majority of people are paid every 2 weeks and have 26, not 24, paychecks per year. For them, paying bills & budgeting on a 2-week cycle makes sense.

For you, and the others paid 2x/month, a monthly bill-paying / budgeting cycle makes sense.

*They *have the “bonus” of [3-paycheck months] occuring twice per year and so it seems to them that they have extra money sometimes.

*You *have the “hit” of [3 two week intervals in the same month] occuring twice per year and so it seems like you get short-changed.
I’m paid once a month well in arrears. It takes a different approach to budgeting to deal with that.

19

Sure they would. Any payment of principal early is a benefit towards reducing the total amount paid over the life of the loan.

Not much, but some.

20

I did.

I’m sorry for the semantic error. I have used the terms interchangeably and that is a mistake. I think most people know what I meant, but if they didn’t, my apologies.

I am not anti-semantic.