The difference between these two payment plans is subtle, but important.
With a bi-monthly payment plan, the borrower makes 24 payments a year (two every month) that equal the same amount as 12 regular, monthly payments. The benefit of this payment plan is that, by paying down the principal twice a month, you save some interest and more of the money from subsequent payments is applied toward the principal. The benefit is minimal, however, and you'll only shorten the term of your mortgage by one or two months at the most.
A bi-weekly payment is slightly different, as payments are made every two weeks. Because the payment schedule is based on the calendar year, a total of 26 payments are made. In other words, you're making the equivalent
of one extra monthly payment every year. The benefit of this is significant; a 30-year loan, at 7% interest, will be paid off in just 23 years.
If you like the idea of paying off your mortgage early, you have a couple of different options:
- Your lender can set you up on a bi-weekly payment schedule which he will manage for you
- You can set up a budget and payment plan of your own that allows you to make a double-payment once a year.
We recommend that you manage your payment plan on your own. While it's more convenient to have your lender do it, you'll pay a little extra for the convenience.
Improve Your Credit Score - Free Consultation