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Bi-weekly mortgage payments


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Bi-weekly mortgage payments

 

Accelerated bi-weekly mortgage payments

Bi-weekly mortgage payments accelerate your mortgage loan payoff by paying 1/2 of your normal monthly payment every two weeks.

By the end of each year, you will have paid the equivalent of 13 monthly payments instead of the usual 12.

This simple mortgage payment technique can shave years off your mortgage payments and save you thousands of dollars in interest.

This mortgage calculator shows you possible savings if you use an accelerated bi-weekly mortgage payment.

Click on this mortgage calculator link to see your savings!

But don't go crazy! You do pay more in a year (the equivalent of one monthly mortgage payment)... But on the long run, you save a lot.

 

How do bi-weekly mortgage payments work?

Bi-weekly mortgage payments options are calculated by taking a simple monthly mortgage payment schedule and assuming there are only four weeks in a month.

Once that is established, this mortgage calculator calculates an accelerated bi-weekly payment by taking your normal monthly payment and dividing it by two.

If you pay 26 bi-weekly mortgage payments, by the end of a year you have paid the equivalent of one extra monthly mortgage payment.

This additional amount accelerates your mortgage loan payoff by going directly against the loan's principal.

The effect can save you thousands of dollars in interest payments and take years off of your mortgage payment.

 

What are bi-weekly mortgage payments?

It’s not surprising that bi-weekly mortgage payments are becoming more popular, just look at the numbers this monthly and bi-weekly mortgage calculator calculates.

Bi-weekly mortgage payments allows you to save on the INTEREST you pay and may dramatically reduce the total amount you pay on your mortgage. And you'll build up equity in your home faster with bi-weekly mortgage payments than you do with standard monthly mortgage payments.

How do you build equity more quickly? With bi-weekly mortgage payments, which is exactly half the monthly mortgage payments of a standard mortgage. As this mortgage calculator shows you, you are making the equivalent of one extra monthly mortgage payment per year. So instead of doing 12 monthly mortgage payments, you are, in effect, doing 13 mortgage payments.

Your twenty-six bi-weekly mortgage payments paid in one year are basically the equivalent of 13 monthly mortgage payments!

And, because you are making two payments per month (in fact, a little more, because the payments are bi-weekly), the interest you owe on your mortgage loan has less time to accrue, so more of your mortgage payments goes to repaying the principal rather than the INTEREST on the loan.

Is a bi-weekly mortgage payment plan right for you? Although the INTEREST savings may be substantial, you will need to be able to budget adequately for the additional mortgage payments. You will be making 26 payments instead of 12, so good planning is essential. Bi-weekly mortgage payments are typically automatically deducted from your checking account.

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Be aware of non-accelerated bi-weekly mortgage payments

Twenty years ago, homeowners from all over the world were plagued with debilitating interest rates.

Five-year mortgage rates peaked at an all-time incredibly high of 21.75%.

One-year mortgages fared little better, reaching a loan shark rate of 21.25%. Horror stories flooded the newspapers and specialized magazines. People were losing their houses, unable to pay their mortgages.

The economy was slowing down, no one was buying and lenders where afraid that single-digit rates, a distant memory, would never come back
(if people don’t borrow, they don’t make money)

Well, history showed them… They were wrong!

Several original financing ideas emerged from that chaotic era: variable rates mortgages, open mortgages, and bi-weekly mortgage payments (weekly mortgage payments too).

The idea was so simple, you wonder why someone didn't think of it before. If you get paid every two weeks, why not pay your mortgage bi-weekly?

Accelerated bi-weekly mortgage payments are the easiest and most effective way for borrowers to save thousands of dollars in mortgage INTEREST. But only if the bi-weekly mortgage payments are done the right way. Despite what many people think, paying a mortgage loan faster than monthly does not necessarily produce great savings.

What’s really important is how the amount reimbursed is determined, not how often the mortgage is paid, may it be with monthly, weekly or bi-weekly payments.

To understand the mechanics behind bi-weekly mortgage payments, a little comparison is needed.

If you borrow $100,000 at 7% per year, amortized over 25 years, the monthly mortgage payments (principal and interest) will be $706.77.
That approach mirrors most US mortgages today.

Click here to check your numbers with this mortgage calculator.

Assuming no prepayments and no late payments are done, $112,038 interest will be paid over 25 years, plus the $100,000 principal amount.

What if you paid 1/2 of your normal monthly payment every second week (bi-weekly)? Instead of a $706.77 monthly payment, your bi-weekly mortgage payments will be $353.38. In other words, you will pay $353.38 every second week instead of $706.77 every month.

If you do just that, pay half your monthly mortgage payment every second week (bi-weekly), the savings are absolutely astounding.

Your 25 year mortgage will be paid in 20.5 years (4 and a half years earlier). Not only is this great, but by doing those bi-weekly mortgage payments you will cut your interest expenses to $88,595.


Bi-weekly mortgage payments produce great interest savings

In our example, the interest paid went from $112,038 to $88,505. That saves you $23,442 in interest, a non-deductible expense since loan INTEREST are generally paid in after-tax dollars.

The interest savings are even better with weekly mortgage payments, but only slightly better. On the same loan, the amortization is as dramatic, a few days difference only and the savings are somewhat better (around $300 over 20 years). Since the loss in savings is negligible (only $300 over 20 years), if you're paid bi-weekly, go with an accelerated bi-weekly mortgage payment system.

 

Bi-weekly mortgages payments work for two reasons:

1. One is the accelerated reduction of the principal amount. More mortgage payments (26 vs. 12) each year means the principal loan amount is reduced faster than normal. It’s like putting $10 into a daily-interest savings account at the beginning of each week, compared to a $40 deposit after week three. The more often you pay, the greater the compounding effect is.

2. Then there's the built-in system of prepayment of the principal. Each year contains 12 months, but those 12 months translate to 26 two-week (bi-weekly) periods. If our monthly mortgage payments were $700 per month, $8,400 would be paid to the lending institution annually. With bi-weekly mortgage payments of $350 every second week, we will be paying the lending institution $9,100 each year.

The beauty of the bi-weekly mortgage payment system is its simplicity: One extra monthly payment is automatically done each year. But it’s not done in one big annual lump-sum prepayment… it’s made in small, manageable chunks of money every two weeks (bi-weekly), 1/26 of $700, or $29.92 bi-weekly.

Since the loan INTEREST are charged on the outstanding principal of the loan, and every extra penny reduces what's you are owing, accelerated bi-weekly mortgage payments help cut the total interest cost.

 

Not all bi-weekly mortgage payments are equal

Unfortunately, not all accelerated bi-weekly mortgage payments are calculated the correct way. Sometimes the concept is completely taken of the mark by the lending institution because they will take the total amount that would be paid annually with a monthly mortgage payment system, and they will divide it by 26 in order to obtain the bi-weekly mortgage payments.

WRONG! This technique just shuffles the deck, if you borrow money with such a system you will accomplish next to nothing.

How can people who aren't financial geniuses ensure they get the real accelerated bi-weekly mortgage payment deal, and really slash five years off a 25 year amortization?

Simple, you can use this mortgage calculator to check the numbers. Also, just negotiate the best possible mortgage rate, ignoring the issue of bi-weekly mortgage payments. Ask what's the normal monthly mortgage payment and then divide that figure by two for a bi-weekly mortgage payment system.

Example: if your normal monthly mortgage payment is $700.00, your bi-weekly mortgage payment will be $350.00.

Be suspicious if the lending institution tells you that your bi-weekly mortgage payments will NOT be half of the normal monthly mortgage payment. If the lending institution tells you that your bi-weekly mortgage payments will be $323,08, not $350.00, then it’s not an accelerated bi-weekly mortgage payment system.

You must understand that you won't reap much simply by making bi-weekly mortgage payments. To save big money and INTEREST, the biweekly mortgage payments must be 1/2 of the standard monthly mortgage payments, amortized over 25 years. Anything else is not really accelerated bi-weekly mortgage payments, it’s just non-accelerated bi-weekly mortgage payments.

Click here to go to the
bi-weekly mortgage payments calculator page.

 

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