Biweekly mortgages can be a great way to save money on a long-term mortgage - if you stay disciplined and keep making the payments.
Basically, bi-weekly mortgage payments enable homeowner's to make half of your mortgage payments twice monthly, amounting to 26 half-mortgage payments annually.
A bi-weekly mortgage is all about making the dates on the calendar work in your favor.
"The payment amount on a bi-weekly plan is thus the same as that on a bi-monthly plan," says Alexander Lowry, a finance professor at Gordon College. "But since there are 26 bi-weekly periods in a year compared to 24 bi-monthly periods, the bi-weekly produces the equivalent of one extra monthly payment every year."
Homeowners can save plenty of cash by sticking to a bi-weekly mortgage plan.
Consider a 30-year $200,000 fixed loan issued at 4.5%. Making those 26 half-mortgage payments would save $27,240 over the course of the loan. Additionally, the mortgage holder will pay the loan off four years and four months ahead of schedule.
That said, there are significant obstacles to maximizing the benefits of a bi-weekly mortgage, experts say.
"The first question someone should ask their lender about making a bi-weekly mortgage payment is whether the payment is applied once received or if the first partial payment is held in a separate account until the full payment is received and then applied," says Heather McRae, senior loan officer at Chicago Financial Services, in Chicago, Ill. "Most lenders do the latter nowadays and it defeats the purpose of doing the bi-weekly mortgage payment."
If your lender doesn't apply the payment until the full payment is received then you can accomplish the same result with a neat accounting trick, says McRae. "Look on your mortgage statement for the principal and interest portion of the payment, dividing this number by 12 (for 12 months), and then applying this small extra amount to each monthly payment," she says. "It accomplishes the same result as a bi-weekly mortgage payment, which is making 13 payment in a year instead of 12."
There are other creative ways to get around reluctant mortgage lenders who try to stop your plan to pay off your home loan early.
"Some lenders make it difficult to implement this type of plan," says Jon Sterling, a real estate specialist at Agents Launch in London, U.K. "If either the client's bank or the lender won't let them automate extra mortgage payments that are applied to the principal of the mortgage, it can become a bit of a hassle."
There's an easy way to bypass problematic lenders, Sterling says.
"A new savings account can be opened at the borrower's primary bank that is specifically reserved for making an extra mortgage payment every year," he says. "A portion of each paycheck can automatically be deposited in that account during each pay period, which is easy to set up."
The amount of the automated deposits each pay period would be the equivalent of 1/24 of a mortgage payment for people who are paid every two weeks or 1/12 of a mortgage payment for people who are paid monthly. "Once a year, a recurring calendar reminder appears that tells the borrower to make the extra mortgage payment," he adds.
You'll want to keep an eye on the calendar, as well, when you're working on a bi-weekly mortgage payment plan.
"A big key is to make sure 50% of the monthly is delivered by the first of the month and the remaining balance by the 15th day of the month so there's no late fee," says Elysia Stobbe, a Jacksonville, Fla.-based mortgage expert and author of the bestselling book, "How to Get Approved for the Best Mortgage Without Sticking a Fork in Your Eye."
Also, avoid third-party companies that will charge a hefty fee for setting up a bi-weekly mortgage payment plan.
"Tons of companies will do this for you for a fee," says Stobbe. "There's no need to waste your money because all you need to do is set it up through your own bank."
Handled right, a bi-weekly payment plan saves thousands of dollars off your total mortgage loan costs. Talk to a mortgage specialist today and see if a bi-weekly mortgage payment plan works for you.