Biweekly Mortgages
A Biweekly Mortgage, unlike its name may suggest, is not a regular mortgage with a payment period of two weeks. In most cases, a product offered to you as a Biweekly Mortgage is, in fact, a Biweekly Accelerated Mortgage. Its main advantage is the accelerated repayment mechanism it is based on. A conventional 30 year fixed rate mortgage implies 12 months * 30 years = 360 monthly payments. Depending on your contract, you can pay the monthly amount either once a month in a lump sum (12 payments a year), or half the amount twice within a month - say, on the 1st and on the 15th day of each month (24 payments a year), or you can pay half the monthly amount every other week and end up with 26 payments a year. The latter case represents the biweekly mortgage and is formally a special type of mortgage, different from simply two payments within a month; it requires a contract that defines it as a Biweekly with all the properties attached.
Basically, the main distinction is the number of payments that fit within a loan year. The trick plays itself. You pay half the monthly amount every two weeks: 52 weeks in a year /2 = 26 payments, which equals to 26/2 = 13 months, i.e. your loan year happens to consist of 13 months! The big deal is that it accelerates the process of loan amortization a lot. A biweekly mortgage based on a 7% 30 year conventional Fixed Rate Mortgage plan pays off in 23 years 11 months instead! The acceleration appears only due to the 13th “month” every year.
However attractive this miracle may look, not many mortgage experts recommend this type of mortgage to borrowers, mainly, because there are other ways to achieve the same result without binding yourself to the strict obligations imposed on you by a biweekly contract. All these ways involve voluntary extra payments to accelerate the amortization of a conventional mortgage. The freedom of choice on when and how or whether at all you are going to make the extra payment is the key argument against a formalized biweekly. In fact, if you already have a, say, 30 year mortgage, it is cheaper to stick to it and make preferably regular extra payments, than to pay the lender for converting it into a biweekly plan, provided your lender charges no penalty for early principal payments.
If you have a little discipline to make yourself pay 1/12th the monthly amount extra towards the principal every month, you will save even a little bit more than with a biweekly, because the principal will start declining earlier in the year - right after the amount of the extra payment has been subtracted from the principal, which usually happens monthly. Another way is to make use of your Christmas bonus and sacrifice it to making the 13th monthly payment of the year - all towards the principal. It is very important to make a written notice on your check that this is a principal payment otherwise the lender may take it as a prepaid following month and will not subtract the amount from your loan’s principal.
Choose either way and the result will be the same or even better than with an official biweekly. The only problem is that you should be disciplined enough to be able to stick to the rules. If you decide to make regular extra payments - make them! However, if you don’t want to be so hard on yourself and you feel relaxed about paying more for your mortgage - you don’t really have to make them so regularly! It’s your choice, which you totally don’t have if you are in a real biweekly contract. In my opinion, people, who want to accelerate their mortgage repayment process, but fear lest they should be conscientious enough to make the extra payments without any extra “push” for it, can go for a biweekly mortgage plan and get themselves obliged to pay on time. If you are more confident about your will power - stick to a conventional mortgage with extra payments at will.
By the way, a 15 (or 20) year conventional mortgage can also be mentioned as an option here, as such mortgages carry lower, compared to 30 year loans, interest rates.
