This Page Was Last Updated: Dec 20th, 2023.
Bi-weekly mortgage payments are becoming increasingly popular as a way to save money and pay off your mortgage faster, but did you know that accelerated bi-weekly payments can get you mortgage-free even faster?
With accelerated bi-weekly payments, you’ll be making the equivalent of one extra monthly payment per year, which is applied directly to the principal balance of your loan. This can help you save thousands of dollars in interest and pay off your mortgage years earlier. By understanding the differences between bi-weekly and accelerated bi-weekly payments, you can make an informed decision about which payment option is best for you.
An accelerated bi-weekly mortgage payment is a simple concept: you make half of your regular mortgage payment every two weeks, instead of one full payment every month. This adds up to one extra payment each year, which can help you pay off your mortgage faster and save you money in the long run.
The way that this works is that there are more than exactly four weeks in a month. February is four weeks plus one day (or two days in a leap year), while other months span over a period of four weeks plus two or three days. Adding up, this results in extra weeks. This means that when you make a bi-weekly payment, you're essentially making 13 monthly payments in a year (26 bi-weekly payments divided by two), instead of the usual 12 payments with traditional monthly mortgage payments.
It should be noted that this extra payment isn't free money, even though it pays off in the long run by reducing your loan balance faster. It comes out of your own pocket, so it's important to make sure you can afford an accelerated bi-weekly payment plan before committing to it.
The main difference between accelerated bi-weekly and bi-weekly payments is the amount of each payment. With a bi-weekly payment, you are making payments that would add up to be the same as if you were to make monthly payments in a year. That’s done by adding up what a monthly payment would equal in a year, then dividing by 26 bi-weekly payments. This results in the same principal paid each year with bi-weekly payments vs. monthly payments. The interest savings come from paying off some of your mortgage balance earlier with bi-weekly payments rather than monthly, which shaves some time and interest off the mortgage.
On the other hand, accelerated bi-weekly payments are what a monthly payment would be divided by two, and then paid every two weeks. This means that with an accelerated bi-weekly payment plan, you are paying more towards the principal balance of your loan each month, which helps you pay off your mortgage significantly faster.
To sum that up, the payment frequency between accelerated bi-weekly vs. bi-weekly payments is the same, which is every two weeks. The difference is the amount of each payment, with accelerated bi-weekly payments being higher than bi-weekly payments. This is what pays off your mortgage faster, saving you interest costs.
To compare the difference between accelerated bi-weekly payments and regular bi-weekly payments, let’s take an example $500,000 mortgage with an interest rate of 5%, for a 25-year amortization. We’ll assume that the interest rate stays the same for the entire amortization length, just for comparison purposes.
A regular monthly payment would be $2,908 per month. After 25 years, you would have paid off your mortgage and paid $372,407 in interest. Below, we’ll see how much money you can save by switching to bi-weekly and accelerated bi-weekly payments.
The formula for calculating accelerated bi-weekly payments is what the monthly mortgage payment is divided by two. This amount is then paid every two weeks.
Since the regular monthly payment would have been $2,908, your accelerated bi-weekly payment is $1,454.
It will take you only 21 years and 6 months to pay off your mortgage, which is 3.5 years faster than with a regular monthly or bi-weekly payment.
The total interest paid is $311,339, which is $61,068 less than with a monthly payment and $60,102 less than with a bi-weekly payment.
This means that by switching to accelerated bi-weekly payments, you’ll be paying off your mortgage 14% faster and pay 16% less interest compared to monthly payments!
Bi-weekly payments are calculated as what the monthly payment would have been multiplied by 12, then divided by 26 pay periods per year. This amount is also paid every two works.
$2,908 per month x 12 is $34,896. Dividing that by 26 gives you a bi-weekly payment of $1,342.
Since your annual payments are still the same as with monthly payments, it will still take you 25 years to pay off your mortgage. That’s not any faster than monthly payments.
The total interest paid is $371,441, which is just $966 less than if you were to make monthly payments.
This means that making bi-weekly payments instead of monthly payments can save you 0.3% in interest costs, with the time it takes to pay off your mortgage remaining the same.
While monthly mortgage payments are made once a month and semi-monthly payments are made twice a month, bi-weekly payments are made every two weeks.
For example, a monthly mortgage payment might be made on the 1st of the month, while a semi-monthly payment might be made on the 1st and the 15th. With bi-weekly payments, however, there is no set date for when payments are made. Instead, they occur every two weeks on the same day of the week. This means that your payments may not always align with specific due dates or paydays.
Let’s say that your bi-weekly mortgage payments are scheduled for every other Friday. During the month of April 2024, there are four Fridays: April 5, 12, 19, and 26. This means that you would make two payments during the month, on April 5 and April 19.
During the month of May 2024, there are five Fridays: May 3, 10, 17, 24, and 31. This means that you would make three payments during the month, on May 3, May 17, and May 31. Combined with a higher payment amount for each payment, this extra payment is what pays down your mortgage faster vs. monthly mortgage payments.
In comparison, monthly and semi-monthly payments have fixed dates, such as April 1 and May 1 for monthly, or April 1, April 15, May 1, and May 15 for semi-monthly payments.
When deciding between bi-weekly or accelerated bi-weekly mortgage payments, it's important to consider your personal financial situation. If you have the financial means to make accelerated bi-weekly payments, it may be a wise choice as it can help you save money on interest andpay off your mortgage faster.
However, if you can’t afford an increase in your mortgage payments, a bi-weekly payment may be a better option for you. It will still help you save a small amount of money on interest, which is better than nothing.