As the name implies, a biweekly is basically a mortgage setup that requires a borrower to make half of the monthly payments every 2 weeks.
While this arrangement can seem like a simple act, it has significant positive repercussions.
Making payments once every 2 weeks results in 26 payments a year.
This means that it makes up 13 full monthly payments when converted. Effectively making it more than the typical 12 months in a year.
This is no illusion performed by a magician. It’s simply due to the fact that there are more than 28 days in each month with the exception of February. Even that has 29 days in leap years.
The extra payments will go towards the mortgage, resulting in a faster pay off and saving on interest charges.
It’s not uncommon to hear about homeowners shaving years off the term of a mortgage simply by converting it from a monthly one to a biweekly one.
The simple math validates that claim.
It is often compared to a bimonthly mortgage because of many similarities. The main difference between the two is that a bimonthly requires half the monthly payment twice a month while the biweekly every couple of weeks.
But a bimonthly mortgage consist of no extra payments during the year. Achieving no significant difference than a typical monthly mortgage, except very marginal savings on interest rates.
As we often assume that a month consist of 4 weeks, people can often be confused between the two thinking that they are the same thing.
And as we can see above, they are different in a small way, yet the consequences are as different as an apple and an orange.
A lot of types of mortgages are structured in a way that does not restrict bi-weekly repayments. This means that the borrower can decide for himself and take action to pay every 2 weeks without needing the loan or account to be restructured.
If required, get a third party or the bank itself to set it up.
Lenders usually won’t mind a borrower being pro-active in this regard. In fact, they often encourage it so that they get as much of their money back as quickly as possible. Anyway, if borrowers deposit more cash into the repayment account than required, the automated system will just eat it up and adjust the outstanding balance accordingly.
Being legally obligated to make these timely payment will enforce discipline and commitment.
Another way is to set up an account that makes automatic payments to the loan account. As long as you deposit half the monthly payment into the account every 2 weeks, it will make the payment and you have now converted your mortgage into a biweekly.
One more way is simply to schedule your credit card online to make payments to the loan account every 2 weeks. Just remember to settle the balance at the end of the month.
Or simply make a double payment each year. This will achieve the same goal as biweeklies as it effectively results in 13 monthly payments a year instead of 12.
Some borrowers even go the extra mile to divide monthly installment amounts by 12 and paying that amount on top of the monthly required payment. At the end of 12 months, they pay in total equivalent to 13 months.
However, that really seems like putting too much work into it.
This should be a simple effort that achieves big results. Sort of like a hack on amortization.
If so much work is required, why not just set it up as a biweekly in the first place.
It must be said however that even though there is a clear benefit of repaying a loan biweekly, it’s not as if it’s the holy grail of mortgage management.
Often times if a borrower has no problems repaying a loan on a shorter term, signing up for a straight monthly payment loan at 15 or 20 years instead of 30 will typically carry a considerably lower interest rate.