How the Biweekly Mortgage Payment Lowers Interest Rates

If you've ever shopped for a mortgage loan then you're well aware that the loan interest rate can make a substantial difference in your monthly mortgage payments. But are you aware of what an enormous difference even a slight variation in that rate can make regarding the total interest you'll have paid over the life of the loan?

For instance, if you take out a 30 year loan for $100,000 at 6.5% (fixed) you'll have paid a total of $127,544.49 in interest by the time you've paid off your loan. But if your interest rate had been 6.25% that figure would be $121,658.19. That's a savings of $5,886.30 for a rate difference of only 1/4%!

Now what if you could reduce that interest rate even further? Taking the same 30 year $100,000 loan at 6.5%, here's how much you could save by further reductions in the interest rate.

Rate  Point Reduction  Savings

6.5%  ----   ---- 6.0%  1/2%   $11,706.3 5.75%  3/4%   $17,458.26 5.5%  1%   $28,751.16

So by reducing the interest rate by a full percentage point, you would save a whopping $28,751.16! But the question is HOW can you go about reducing the interest rate on your loan?

Well, you could refinance your mortgage to get a lower rate. But refinancing has some drawbacks.

First of all, to get a lower rate you would have to refinance at a time when the going interest rates are lower than when you took out your mortgage. But if current rates are the same or higher, then you would have to wait until they go down ... and you may have a long wait!

Also, refinancing means you'll have to pay closing costs that can run into hundreds of dollars. In addition you'll most likely have to change lenders and you'll have complicated forms to fill out and a stack of documents to sign.

But what if there were a way to lower your interest rate by a full percentage point or more and still keep your monthly payment amount the same ... WITHOUT refinancing, paying closing costs, or changing lenders?

By switching to a "biweekly mortgage payment plan" you can reduce your "effective interest rate" without the expense or hassle of refinancing.

Let me explain.

The "effective interest rate" is defined as the ACTUAL interest you'll pay over the life of your loan. Now you're probably thinking, "How can the actual interest rate differ from the interest rate the lender is charging me?"

To illustrate let's return to our first example, the $100,000 loan at 6.5% over a 30 year term.

The loan papers you signed when you took out the loan state "6.5%" as your interest rate. And if you make your payment once every month, like most people do, you'll actually be paying 6.5% interest on your loan. But by switching to a biweekly mortgage payment you can make the actual interest you pay lower than what it reads on your loan papers.

At 6.5% your monthly payments would be $ 632.07 (not including escrow for insurance and taxes). Now let's take that $632.07 payment, and instead of paying it once every month, we'll pay HALF that amount ($316.03) once every two weeks.

The result? Hold on, because this is going to astonish you!

Your original loan will be paid off in just over 24 years (not 30) and the total interest you'll have paid will be $99,549.65 ... that's $27,994.84 LESS than you would otherwise have paid. And that reduction in interest paid makes your ACTUAL interest rate only 5.22% ... more than a full percentage point less.

Let's put it another way. The interest you actually paid is the same as if you had taken out a $100,000 loan for 30 years at only 5.22% interest, and made regular payments every month.

Now what if your loan had been for more (or less) than $100,000? The "Effective Interest Rate" of 5.22% would still be the same in any case. But the greater the amount you borrowed, the more you'd have saved by going to biweekly mortgage payments.

What if your loan had been for $200,000? You'd have saved $55,989.68. How about $500,000? You'd have saved an unbelievable $139,974.20.

Now what if you've already been paying on your current loan for a number of years?

Taking our previous example ($100,000, 30 years, 6.5%) let's say you've already been making payments for 10 years, and then switch to a biweekly mortgage payment. You would still save $10,342.04. And while that's not as good as $27,994.84 it would still make it more than worth your while to switch to a biweekly mortgage payment.

There are additional advantages to a biweekly mortgage payment plan.

• All payments fall on the same day of the week. So if you get paid on a Thursday, you can make every biweekly mortgage payment fall on "payday."
• You can set it up so that payments are automatic, so you'll never have to write another check nor worry about forgetting to pay
• You'll pay your loan off earlier and become debt free years sooner.
• You'll be turning your current mortgage into an investment program
• You'll be building equity in your home up to 3 times faster!

So the next time you write a check for your mortgage payment, take a moment to think about how much money you could be saving by switching to a biweekly mortgage payment ... money that could be going into YOUR pocket, and not your lender's!