Timeline for How exactly does a biweekly payment schedule on your mortgage reduce the amount of overall interest paid over the life of the loan?
Current License: CC BY-SA 4.0
13 events
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| Jan 23 at 17:41 | comment | added | D Stanley | @Nelson I have seen predatory car loans and personal loans where the entire interest for the loan must be paid, but never a mortgage (the interest is listed as a lump "fee" that is added to the total amount due instead of amortized). For an amortized mortgage, the only interest you owe in a month is the monthly interest rate times the principal due. | |
| Jan 23 at 16:56 | comment | added | void_ptr | @Nelson That is absolutely not how mortgage works. No bank ever will do that nor is allowed to do that. | |
| Jan 23 at 14:27 | comment | added | D Stanley | @Nelson If your half-payment is less than the total interest for the month, then yes it usually goes to the interest part first (the bank gets the money you owe them before they let you pay down principal). It doesn't make much of a difference in the end. If your half payment was more than the monthly interest then part of it would go to principal. | |
| Jan 23 at 14:24 | comment | added | D Stanley | @StrangerToKindness If the loan is reamortized to biweekly, meaning that the payment is recomputed so you pay it off over the same time but make 26 payments per year, then the payment will be slightly lower and you'll save very little interest. If instead you pay half of the monthly payment biweekly you pay it off faster because you pay 26 half payments instead of 12 full payments. In my experience the latter is much more common, | |
| Jan 23 at 11:52 | comment | added | StrangerToKindness | The first and last paragraph confuses me. As I understand the first paragraph, the biweekly payments are (slightly) less than half of the monthly payments, as one is based on a divisor of 26, and the other a divisor of 12. But in the last paragraph, the biweekly payments are equal to half the monthly payments (otherwise there would be no "extra" payment). | |
| Jan 23 at 9:27 | comment | added | Nelson | @void_ptr What I mean is that some banks do not let you reduce your interest paid on the loan by allowing you to pay your principal early. Let's say you had a mortgage for 200k. If you turn around and paid 200k towards the principal, your interest drops to 0 because your principal is now 0. However, if they do not apply your payment towards your principal, they'll put your 200k towards the expected interest for the total mortgage, and you can't actually clear your loan unless you pay the entire sum of principal + interest, even though no time has passed to accrue any interest. | |
| Jan 23 at 8:01 | comment | added | quarague | @Nova If over the course of a year you pay more (total amount equal to 13 monthly payments versus 12) then you will pay down the loan faster and save on interest. But that is not an effect of the payment structure biweekly versus monthly but rather the simple effect of making larger payments. The difference between spreading the same amount of money over biweekly versus monthly payments is negligible or zero depending on how often the bank computes interest. | |
| Jan 23 at 4:44 | comment | added | void_ptr | @Nelson Your interest is what it is - principal balance multiplied by interest rate. You pay exactly the interest that you accrued, no more and no less. | |
| Jan 23 at 3:20 | comment | added | Nelson | @DStanley Some banks straight-up don't let you reduce your interest because they apply your extra payments to the interest and not the principal. So yes, it is very much dependent on how they apply it, and some ways definitely makes them more money than others. | |
| Jan 22 at 22:47 | comment | added | D Stanley | My experience has always been that the monthly payment does not change, you just pay half of it bi-weekly. I have never seen a bank bank reduce the payment for a bi-weekly amortization. Since you make 1 extra half-payments a year, the total length of the loan and the interest is cut significantly versus reducing the payment amount and keeping the length of the loan the same. You could do it by just making extra half-payments yourself, so it depends on how the bank applies those payments. | |
| Jan 22 at 22:30 | comment | added | Nova | Could you take a look at Sheet 1 and 2 in the spreadsheet? I took two approaches to how you could potentially put together an amortization schedule for a biweekly pay structure. First approach is where you calculate a new payment using n = 26, the second is when the monthly payment is just the monthly payment divided by 2. The second leads to huge gains in interest over the life of the loan, while the first approach saves just a few hundred dollars. | |
| Jan 22 at 16:00 | history | edited | D Stanley | CC BY-SA 4.0 |
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| Jan 22 at 15:47 | history | answered | D Stanley | CC BY-SA 4.0 |