Accelerated bi-weekly payment options are calculated by taking a monthly payment schedule and assuming there are only four weeks in a month. You can calculate an accelerated bi-weekly payment, for example, by taking your normal monthly payment and dividing it by two. Since you would pay 26 bi-weekly payments, by the end of a year you would have paid the equivalent of one extra monthly payment. This additional amount accelerates your loan payoff by going directly against your loans principal. The effect can save you thousands of dollars in interest and take years off of your mortgage.
An example of how much you could save by making a biweekly payment would be as follows:
Loan Amount: 100,000
Rate: 6%
Term: 30 years
Your biweekly payments would be 299.78, you would make 635 payments, your loan would be cut down to 24.36 years and would save you $25,418.
By paying bi-weekly you'll make twenty-six half payments, or thirteen full payments each year or one more than you would make by sending the lender traditional monthly payments.
Every dollar of that extra payment goes towards reducing the principal balance of your loan, the balance that future interest calculations are based on. As you reduce the principal, you reduce the total interest paid and the length of time it takes to pay the loan.
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For greater savings than you can get from a pseudo bi-weekly, all you have to do is divide your current monthly mortgage payment by twelve, and send in that amount as a pre-payment with each month's check.
Third parties often contact mortgage holders and offer to set up a bi weekly payment plan for a nonminal fee.
Such a fee is,in most cases, quite unnecessay as many mortgage servicers will set up the plan for free or the borrower can simply set up their own schedule and send in bi-weekly payments.
Bi-Weekly Payment Plans offered by third parties are unnecessary because borrowers can do the same thing themselves by paying an extra 1/12th of a payment each month.
Another way to acheive the same result is to pay one extra payment once each year.
Bi-Weekly payments can also be utilized to off-set the negative amortization (Neg Am) that occurs on some types of loans such as pay option ARMs. In these types of loans there is a minimum payment that does not cover the total interest for the month, the difference between the minimum payment and an interest only payment is added to the balance of the loan. The bi-weekly option essentially makes an extra monthly payment for the year, the extra payment and the smaller Neg Am amounts minimize he overall all effect of making minimum payments.
Bi weekly mortgages are especially great for people with ARM loans. This is because the interest you are charged is determined by your remaining principle balance. This means that if you are making 2 payments each month, then you are charged less interest. In some cases, paying on a biweekly schedule could result in your mortgage being paid off 8 years sooner then if you did not use the biweekly.
