Is a Biweekly Mortgage Better Than a Payment Increase?

July 10, 2000 "I'm considering converting my mortgage to a biweekly payment plan.  Would I do as well if I simply increased the amount of my monthly payment?" You'd do better. For example, the monthly payment on a $100,000 8% loan for 30 years is $733.77.  On a biweekly payment plan, you'd pay half this amount every two weeks, or 26 payments over a year.  This is the equivalent of one extra monthly payment -- 13 instead of 12.  You'd pay off your loan in 277 months, rather than 360 and save $44,160 in interest payments. Alternatively, divide your monthly payment by 12, and add that amount ($61.15) to your payment every month.  The new payment would be $794.92.  Over the year, you would pay an extra $733.77, the same as with the biweekly.  But the loan would pay off in 275 months and you would save $45,906 in interest. Why the difference?  With a biweekly, it takes a year before additional payments are made to your principal.  Only then do you begin saving on interest.  It takes a year for biweekly payments to add up to an extra payment. During that year, your money accumulates in an account on which you receive no interest.  If, however, you increase the monthly payment, principal is reduced by an extra $61.15 starting in the first month, and interest savings begin in the second month. You can test this with calculator 2a on my web site.  To test the biweekly, add an extra payment equal to the regular monthly payment, annually beginning in month 12.  To test an equivalent increase in monthly payment, add an extra payment equal to 1/12 of the regular monthly payment, monthly beginning in month 1. Copyright Jack Guttentag 2003

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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