Mortgage Amount: Enter the amount of the mortgage. If you are looking to refinance the mortgage, this would be the new amount of the refinanced mortgage. The calculator allows only amounts between 14,000 and 500,000. But even if you have a more expensive mortgage, the calculator will help give you an idea of how bi-weekly payments accelerate mortgage payoff.
Term: Enter the mortgage's term--that is, the number of years allotted to pay the mortgage. The calculator lets you select from 1 to 30 years. (Thirty years is the traditional mortgage term, but a shorter term will save you a great deal in interest over time.)
Interest rate: the interest rate of your current mortgage or the interest rate you expect on a refinance mortgage.
Mortgage Payments and Payoff Explained
You know that mortgage interest is calculated on a mortgage's principal (the total amount borrowed). But did you ever really think about just how much you save in interest as your principal gets smaller as you make payments toward it? As your principal shrinks, there's less of it on which to charge interest. Each month that goes by, your interest decreases.
If you make just a little bigger payment each month toward your mortgage, you will dramatically reduce the interest owed on your mortgage by the end of the year. Of course, in addition to that, you will have cut into the principal by that much more than you would have otherwise.
Bi-weekly Mortgages and Accelerating Mortgage Principal Payoff
Do you have the financial discipline to pay more toward the mortgage each month than you have to? If you doubt your resolve to make extra payments each month, a biweekly mortgage may be the answer. A biweekly mortgage takes payments every two weeks rather than every month. The savings vs. a once-a-month mortgage result from the fact that there are more than four weeks in the average month. The average month is more like four and a half weeks. So by the end of the year making payments every two weeks, you've made the equivalent of 13 monthly payments instead of 12.
Do you get paid every two weeks? A bi-weekly mortgage might be more convenient for you than a once-a-month mortgage.
Bi-Weekly Mortgages: No Effect on Amortization
Don't make an assumption that many people make when they first hear about bi-weekly mortgages: the assumption that bi-weekly mortgages affect how interest accumulates during the month (amortization). They don't. The only reason biweekly mortgages save you money over time is because you are paying more toward principal on a regular basis. However, the interest keeps accumulating at the same rate. There is no difference between a bi-weekly mortgage and simply paying a little more each month.
The important point to understand is that a typical bi-weekly mortgage does not put your middle-of-the-month payment toward principal immediately. Instead, the lender simply holds onto that payment and combines it with the second payment into one monthly payment.
In rare cases, people are able to talk a mortgage lender
into writing a mortgage that takes payments every two weeks and puts both payments toward principal immediately.
What are the advantages of having both payments go toward principal immediately?
. You stop compound interest in its tracks halfway through the month. You wipe the interest slate clean at the end of two weeks rather than just the end of the month, so that you don't keep paying interest on interest for an entire month.
. You have a smaller principal on which to calculate interest at the middle of the month. That means you are not only paying less interest on interest; you are paying less interest on principal.
Of course, banks like to get their interest, and the financial services industry is built around monthly loan payments rather than every-two-week payments. So good luck getting a mortgage that applies payments toward principal every two weeks (though it can't hurt to ask).