We find clients often ask about bi-weekly mortgage payments. There are actually two types of Bi-weekly payments: Regular bi-weekly and Accelerated bi-weekly. When most people use the term biweekly, they are referring to accelerated biweekly. However, many may not even reailze that there is also a non-accelerated version. What’s the difference between a biweekly and an accelerated biweekly payment? Let’s look at the descriptions for both, so you can then decide which one you think is right for you:
Accelerated Biweekly
An accelerated biweekly payment is calculated by taking your monthly payment and dividing it by two. The payment is then made every two weeks, hence the term ‘biweekly’. By accelerating the payment, you’re making the equivalent of one additional monthly payment per year, which is applied directly toward your principal. Accelerated biweekly payments will automatically drop your effective amortization from 25 years down to roughly 22 years, 6 months, or a 30 year amortization down to roughly 27 years. The exact amount will vary slightly depending on your mortgage rate.
Biweekly
A regular biweekly payment is calculated by multiplying your monthly payment by 12 and then dividing by 26 (as there are 26 payments per year). As your total payments for the year are identical to making monthly payments, regular biweekly payments to not provide any additional benefit. If you start with a 25 year amortization, your effective amortization will also be 25 years unless you unless you do lump sum payments or increase your payments.
Payment Differences
As an example: If you have a $300,000.00 mortgage at a rate of 1.99% and start with a 25 year amortization. Bi-weekly payments would be $585.65 and accelerated bi-weekly payments would be $634.45. Note: Some banks only offer accelerated bi-weekly payments.
Which is the best option for you?
This will depend on if you are setting your bi-weekly payments to pay off your mortgage faster or if you are setting them as bi-weekly for another reason. Such as lining up with pay dates. If you have other high interest debt it might make more sense to have a regular bi-weekly payment and use the extra cash flow to pay off other debt or maybe invest.