Bi-Monthly Mortgage Payments: The Real Deal

What is the deal with a bi-monthly mortgage payment plan anyway? 

If you have a mortgage, chances are you've received a "money-saving offer" to convert your amortization into a bi-monthly payment plan.  Every time I've seen one of these offers, there has been a charge of around $300 for the conversion.  This bi-monthly offer is just another way for banks to scam consumers as far as I am concerned.  I would strongly recommend that you do not sign up for bi-monthly mortgage payments, even if your mortgage company does not charge you.

Do bi-monthly mortgage payments really save you money?

Yes!  Absolutely!  If your mortgage payment is $2000 per month, but you make two $1000 bi-monthly payments instead, you will pay off your mortgage sooner and you will save a small fortune in interest.  Is this some kind of finance magic?  It just doesn't seem to make sense! 

There is no mystery; here's how it works:  There are 52 weeks in a year.  If you make bi-monthly payments, you are actually being billed every two weeks- not really twice monthly.  That amounts to 26 half-payments in one year.  Twenty-six half-payments would equal 13 full mortgage payments.

So the bottom line is that you are essentially making one extra mortgage payment each year if you pay bi-monthly.  That's it.  No big mystery.  No financial magic.  You are just paying down your principal faster, which reduces the interest that you pay on said principal.  "Bi-monthly" is a misnomer.

All you have to do is make one extra payment per year and you will achieve the same results as if you converted to a bi-monthly plan.  Do you really need to pay $300 for this?  You can send in one extra payment per year and you don't have to fork out three hundred bucks for the privilege. 

Or, you can send in a little extra each month.  For example, if your payment is $1200 per month, you could send in an extra hundred bucks each month.  One hundred extra dollars multiplied by 12 is $1200, right?  Sending in $1300 each month would be the same thing as sending in a bi-weekly payment or paying once extra each year. 

However, if you really like the idea of paying once every two weeks instead of making the extra payment, go ahead and send your mortgage company a check every two weeks.  Nobody is going to stop you.  I promise, your mortgage company will deposit your check even though you aren't on the bi-monthly plan.

How much can one extra payment per year save you?

If you owe $200,000 and your interest rate is 6.5%, you will pay $231,677 in interest, plus the $200,000 principal, for a grand total of $431,677. 

If you make one extra payment per year, paying down your principal faster, you will save over $52,000!  Your new total payment will be $379,292.

Of course, if your interest rate is higher than 6.5% and / or you owe more than $200,000- your savings are even more dramatic.

Personally, I send in a double-payment each month.  By sending in double, my 30-year mortgage gets paid off in about ten years.  My own interest savings will amount to about $250,000!

If business slows down, I'll have to slow down my fast pay-back.  But I am not locked into anything.  I can send in one extra payment per year or I can continue send in double.  I am certainly not going to get locked into a bi-monthly payment plan and have to pay for the inconvenience on top of it!  That's just ridiculous.