What Are Bi-monthly and Bi-weekly Mortgage Plans? Knowing the difference can save you a lot of money.
Most mortgage payments are made once a month; however, some lenders offer different options: bi-monthly and bi-weekly. People get these two payment plans confused with one another, often calling a plan bi-monthly when it is really bi-weekly. They are very different.
What is the difference between bi-weekly and bi-monthly? With bi-weekly and bi-monthly payment plans you divide your normal payment in half. The difference lies with when you make that payment.
The prefix “bi-“is used differently in each term. Bi-monthly means twice a month (rather than every two months) and bi-weekly means every other week. So with a bi-weekly payment you’re making payments every two weeks. With bi-monthly payments you’re making payments twice a month (usually on the 1st and the 15th). This may sound the same, but they are very different.
Since there are 52 weeks in a year, if you make a payment every two weeks, you’ll end up making 26 payments each year. If you make two payments a month, you’ll make 24 payments (2 x 12). Therefore you make more payments with a bi-weekly plan, which means you’ll pay it off faster. With a bi-monthly plan you don’t pay anything extra, you just structure your payments differently. Lenders usually require an automatic bank draft for both options.
The advantage of paying your mortgage bi-monthly is that you save a little on the interest. You pay the same amount each month, but break up your payments into two parts, paying one on the 1st and one on the 15th. Since you are paying off some of your principal early, you avoid paying interest on that little amount for 15 days. Normally you cannot do this, because the lender will simply hold the money until the end of the month, paying your total monthly payment in one lump sum. Even if you pay early, it won’t be applied to your account and you will not save on the interest. With the bi-monthly plan the lender is obligated to apply it immediately.
The advantage of paying your mortgage bi-weekly is that you are paying an extra two payments a year (26 payments instead of 24), which means you’ll pay your loan off earlier. With a bi-weekly payment plan you’ll pay off your 30-year loan in 23 years and 11 months. That is quite a savings! Some lenders will collect your biweekly payments and make the monthly payments as normal, saving the rest in another account. At the end of the year they apply the extra payment.
