A semimonthly payment schedule won't save you much money. With this plan, you are making two payments per month instead of one, adding up to the equivalent of 12 full payments. By making semimonthly payments on a 30-year mortgage, you’ll pay off your loan in 29 years 11 months – only one month sooner than if you were to make monthly payments. Consequently, you’ll save only the amount of one month’s worth of interest over the life of your loan. However, making half your regular mortgage payment every two weeks, or biweekly, will save you a bundle.
Semimonthly or Biweekly
Biweekly is not the same as semimonthly. Since there are 12 months in a year, you would make 24 half-payment on a semimonthly plan. Because there are 52 weeks in a year, if you make a half-payment every two weeks, you end up paying 26 half-payments, or the equivalent of 13 monthly payments. That seemingly little difference will result in paying off your 30-year loan in about 25 years. On a $200,000 mortgage at 4 percent interest, you would save more than $23,000 in interest.
How It Works
Your mortgage payments stay the same throughout the life of your loan. Every month, your mortgage payment goes to pay the interest on your outstanding balance and whatever is left over goes toward your principal. In the beginning, when your balance is at its highest, most of your monthly payment is eaten up by interest and very little goes to pay down your principal.
For instance, if you have a $100,000 mortgage at a 5 percent annual interest rate for 30 years, your mortgage payment would be about $536 per month. The first month of your loan, the interest you owe is calculated by taking 5 percent of $100,000 and dividing it by 12 because you are paying for one month's worth of interest, or $416. This means that of your $536 payment, $416 goes to interest and $120 goes to principal. The next month, your loan balance is $99,880. Using the same interest calculation, the interest and principal ratio is pretty much the same because the difference is only pennies. About 15 years into your loan, the ratio of interest to principal starts to equal out. By applying the extra monthly payment amount completely to your principal balance, you reduce the amount of interest you pay.
Don't just start making biweekly payments on your own without setting up a formal agreement with your lender. After all, you can't just decide on your own to change the terms of your loan agreement. Some lenders don't allow partial or biweekly payments, or they might charge a prepayment penalty if your loan is paid off early. Others have biweekly plans, but charge big fees for them, either up front or per transaction.
Also, not all biweekly plans are the same. Some lenders calculate 12 months' worth of mortgage payments and divide it by 26. Seems right -- there are 52 weeks in a year and half of that is 26. But under this plan, the ratio of interest to principal is the same as it would be on a standard monthly schedule. There is no extra payment and nothing extra to be applied directly to reduce the principal, so there would be almost no savings.
For a standard mortgage, the savings in a biweekly plan comes from the extra payment you make per year toward the principal, not the timing of paying every two weeks. If you get paid every two weeks, making a half-payment on your mortgage may be easier to budget, and it won't really feel like you are coming up with a whole extra mortgage payment each year.
As an alternative to biweekly payments, you can make occasional extra payments that go directly toward principal reduction. It doesn't take much to deliver big savings. Using some of your tax refund or annual bonus money to reduce your mortgage principal can bring you big savings over the life of your loan.
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