Mortgage “Half” Payments: How Much Do They Save?

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    Many mortgage lenders offer borrowers the option of making half payments on their mortgage twice a month or bi-weekly payments instead of making a full payment once a month. How do biweekly payments work? What about twice a month payments? Which is the right option for you?

    An example of how bi-weekly payments work

    For example, let’s say you are in the situation that Paul, a simple dollar reader, is. He just took out a $ 219,000 mortgage. His monthly payment for this mortgage is $ 1,300.89. Paul wants to know if paying half the mortgage twice a month will save him a significant amount.

    The first thing he has to do is Make sure his mortgage allows early payments – and how they work. Call your lender and ask them how often the interest is compounded (this is usually compounded daily or monthly based on the average balance for the month – if it’s only compounded monthly, prepayment won’t help) and how much payments are made during one month will be applied to your loan (they must be applied immediately upon receipt for this to work). Most Loans work that way, but not all. If you are interested in this plan but your lender does not allow early payments, you can manage a similar half payment plan yourself.

    There are two options for early payments.

    Bi-monthly mortgage payments

    First, Paul can literally make two payments a month – say on the fifteenth of every month and on the last day of every month. This is known as a bi-monthly mortgage payment. This means that over the course of a year, Paul will pay the exact same amount of principal that he would otherwise pay. The only difference is that he pays half of his payment on the fifteenth of each month and the remainder of his payment at the end of each month.

    If you assume monthly compounding with the average balance for the last month, Paul will save a little more than two months on the mortgage balance. He would save $ 2,931.33 in interest, which would mean he could skip his last two payments and only make one partial final payment.

    Bi-weekly mortgage payments

    Another method doing this would be too Just make a payment every two weeks equal to half the amount on the monthly mortgage bill. This is known as a bi-weekly payment. Over the course of a year, this adds up to an additional full payment: since there are 52 weeks in a year, you would make 26 half payments and thus 13 full payments.

    Assuming monthly compounding using the average balance of the last month This method saves Paul $ 41,117.09 over the course of the loan. His final installment would be almost five years earlier.

    This method goes perfectly with many income plans (the federal government issues paychecks every two weeks, for example), which means you can simply assign a certain amount from each paycheck directly to your mortgage and then not think about it again.

    For some, bimonthly or monthly payments are best as their paychecks don’t align well with a bi-weekly schedule. Also, some families may have difficulty making a full half mortgage payment every two weeks.

    On the other hand, Bi-weekly payments – every two weeks – provide a great financial incentive to give them a chance. On top of that, it directly matches many salary plans and is a financial winner.

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