Bi-Weekly Vs. Monthly Mortgages
When a person takes out a mortgage to purchase a home, he generally agrees to pay back the loan in installments. Generally, the person is required to make payments of the principal plus the accrued interest on a monthly basis. However, in some cases, a borrower is given the option of making payments every other week. These are known as bi-weekly mortgages.
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Features
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Under a bi-weekly mortgage, the borrower sends the lender a payment every two weeks equal to half the cost of a regular monthly payment. Under a regular mortgage payment plan, the lender would receive one payment a month for 12 months, adding up to 12 monthly payments. However, because the are 26 weeks in a year, under a bi-weekly plan, the lender receives 13 payments -- an extra payment each year.
Benefits
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There are several advantages to having a bi-weekly. For one, a bi-weekly payment schedule allows the borrower to pay off their mortgage significantly faster. Secondly, the payment schedule of a bi-weekly mortgage coincides nicely with employees who receive a paycheck every two weeks. Through direct deposit and direct withdrawal, some employees can have their paycheck deposited on the same day as their mortgage payment is withdrawn, making the mortgage a virtual deduction from their paycheck.
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Downsides
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According to Bankrate.com, many lenders charge borrowers a significant fee to participate in their bi-weekly payment program. This can include several forms of charges and fees that can offset the benefits of paying off the mortgage quicker. Bankrate.com advises reading the lender's contract carefully before agreeing to enter a bi-weekly payment program.
Misconceptions
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According to Bankrate.com. there are a couple common misconceptions about bi-weekly payment programs. For one, some borrowers mistakenly believe that bi-weekly mortgages help the borrower's credit. In fact, the payment structure should have no effect on credit so long as payments are made on time. Secondly, borrowers often mistakenly believe that bi-weekly payments will reduce compound interest payments. In fact, the loan servicer is probably still paying the loan on a monthly basis.
Expert Insight
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According to Jack M. Guttentag, a professor of finance emeritus at the Wharton School of the University of Pennsylvania and the owner of GHR Systems, a mortgage technology company, bi-weekly mortgage payments result in a significantly shorter payment term. For instance, a 30-year mortgage with a 7 percent rate of interest would, if converted to a bi-weekly mortgage, be paid off in less than 24 years. This is due to the extra mortgage payment.
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