Biweekly Mortgage Calculator
This calculator will demonstrate how making one half of your mortgage payment every two weeks can save you money in the long run. This accelerated schedule will amount to one extra mortgage payment per year, and you will see how much faster you could have your loan paid off. You can also add an additional payment amount with each payment to pay off the loan even faster.
First enter your mortgage's beginning loan amount, current interest rate, and original loan term. Then indicate how many payments you have already made and the date of your next payment. Finish up by entering the amount of money extra that you could afford to pay on your mortgage every month. Your original monthly principal & interest payment to date is automatically calculated based upon the amortization schedule.
Press CALCULATE and you'll receive a detailed cost breakdown of your current loan expenses. No matter what you choose, you'll soon discover how one extra payment per year can save you time and money.
Buying a Home: How to Save With Biweekly Payments
Paying your monthly mortgage represents a slow and steady approach to repaying your lender. The long-term commitment for this sort of payment schedule is grueling and relentless. Wouldn't you prefer to pay off your outstanding debt in a much shorter period of time? You probably are thinking yes while worrying that there is no way that you can afford it. The solution is easier and cheaper than you realize. Here is your guide to saving money via biweekly payments.
What Are Biweekly Loan Payments? Is it a Good Idea?
The lexicon isn't tricky here. The central change between a regular mortgage payment and a biweekly schedule is right there in the terminology. When you pay your regular monthly mortgage payment, you agree to perform a dozen annual payments toward the amount of principal borrowed. With a biweekly mortgage, the situation changes only slightly. Rather than pay once a month, you pay every other week.
How is this option any different? Think about the calendar for a moment. How many months are in a year? How many weeks are in a year? The answers are 12 and 52. A dozen annual payments toward your principal are good. Twenty-six payments toward your principal are better. The explanation is that you have effectively paid one full month extra as 26 biweekly payments is the equivalent of 13 monthly payments. Better yet, the process is so organic that you barely even notice the change.
Most people are paid either weekly or biweekly. If you determine to direct every other payment toward your mortgage, you will quickly grow accustomed to this behavior. You will always feel as if that money has been spent, thereby eliminating the potential risk of using it on other bills. All that is required is a slight change in behavior upfront.
The following table shows how a small difference in payments can lead to huge savings. In this hypothetical scenario, a 30-year fixed loan for $250,000 at 5% interest is used.
|Monthly||Equivalent Regular Biweekly||Accelerated Biweekly (1/2 Monthly P&I)||Accelerated + $50|
|Payment With Escrow||$1,642.05||$757.57||$809.49||$859.49|
|Total Paid Per Year||$19,704.60||$19,696.86||$21,046.74||$22,346.74|
|Years to Pay Off Home||30||30||25 years, 4 months||22 years|
|Time Saved||0||0||4 years, 8 months||8 years|
|Total Interest Expense||$233,141.29||$232,906.28||$190,227.53||$162,433.82|
From the table you can see that if you adjust a monthly payment to the equivalent bi-weekly payment the interest savings will be minimal and the loan will take just as long to pay off. What creates significant savings is paying extra by making each biweekly principal & interest payment be half of the regular monthly P&I payment, so that you are making the equivalent of at least one extra monthly payment each year to pay down the principal faster.
Pros and Cons of Biweekly Payments
The biggest con of making biweekly payments is having to run the numbers initially to figure out how much you should pay to cover the core principal & interest payment along with other fees associated with your home loan. The above calculator helps homeowners simplify this task. :)
Some services which claim to automate biweekly payments charge a fee that exceeds the interest savings. You should be able to switch to a biweekly payment plan without incurring other fees. Extra fees that a third party service might charge could instead be applied directly to your loan payment to pay off the home much quicker.
An easy rule of thumb for the principal and interest portion of your loan is to pay half of what your monthly payment is, so that you are paying an extra month worth of payments each year.
For the other costs associated with homeownership (including property taxes, homeowners insurance, PMI, HOA fees, etc.), if these expenses are embedded in your monthly home loan payments then to calculate the biweekly equivalent you would multiply the expenses by 12 (for 12 months in a year) and then divide that number by 26 (as there are 52 weeks in a year).
If there are some costs which are not embedded in your monthly loan payments then you would have to remember to budget for those separately each month, which would be just like the current monthly payment you are already paying. And you could save for them using the same calculation (divide by 26, then multiply by 12) to figure how much you would need to set aside out of each paycheck to cover those monthly payments.
The biggest benefits of biweekly payments are paying off the loan much faster, and saving many thousands of dollars in interest expenses over the life of the loan. Most homeowners won't notice the small increase in payments they are making, but they will notice their loan being paid off years earlier.
Should You Make Biweekly Mortgage Payments? How Do They Help?
You should already have guessed that by making an extra loan payment annually, you can cut the length of your loan. The shocking aspect is the amount of time by which the loan is reduced. Simply by paying biannually rather than monthly, your loan will be negated after 25 years and six months, four and a half years ahead of schedule.
You may be wondering how this is possible. The explanation is simple. Even if you don't realize it, the early years of a 30-year mortgage are tilted in favor of the lender. In order to pay off your mortgage, you need to eliminate all remaining principal obligations. Most of your early payments are directed toward paying off the interest rather than the principal.
If this news is surprising to you, look at a copy of your most recent mortgage statement. You will see the precise breakdown of where each dollar of your payment goes. If you are in the first years of repayment, you are not making forward progress toward the principal because most of the money is paid toward the interest.
This is a frustrating feeling for a homeowner. Escaping the obligation of your mortgage is one of the most satisfying experiences possible. The fact that you make little progress early in the life of the loan is problematic. Biweekly payments allow you to pay toward the principal at a faster rate.
What to Do If You Don't Have a Biweekly Loan
Believe it or not, you still can attack your loan in the same fashion. Virtually no mortgage loans punish borrowers for early payment by imposing penalty charges. So, even if your current loan is a conventional 30-year mortgage, you can still begin to treat it as a biweekly loan. All that you need to do is alter your banking habits.
Rather than making a single monthly loan, set up a bank account specifically for the purpose of paying your mortgage. Every two weeks, deposit half of your current monthly payment into this account. Every four weeks, pay your mortgage from this account. You are under no obligation to conform to the bank's expected terms, as long as you pay at least the requisite amount each month.
To a larger point, you can take an additional step to save yourself even more long term. Now that you understand just how much of your mortgage payment goes toward interest rather that principal, add as much money as you can to your biweekly or monthly payment. Even an additional $25 paid biweekly can reduce the length of your mortgage by almost two years. Simply by performing the steps of switching to biweekly payments and directing an additional $50 monthly to your mortgage, you can reduce its length from 30 years to 23 years and eight months.
Paying your mortgage as quickly as possible can save you tens if not hundreds of thousands of dollars. Simply by either selecting a biweekly payment schedule or crafting one of your own, you can pay off your loan several years faster.
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