The "Bike" Mortgage
by Lynn Siprelle
irst, the good news: John (aka JJ) got a new job yesterday. It was all very sudden. He interviewed Tuesday and they made him the offer yesterday. He'll be doing small business support at a very large Internet company, which from now on I will call the VLIC for short. And he starts Monday! And so does our health insurance! This has been the shortest period of unemployment for him that we can remember, in all our years together.
This time around, we've been unnaturally calm. One reason for this is, we're paid ahead on our mortgage. We are the equivalent of a month ahead. If we had had to, we could have skipped a house payment (probably to put that money towards COBRA health insurance) and still have been all right financially and legally.
How did we get a month ahead--us of all people? We pay our mortgage every two weeks instead of once a month. This is called a bi-weekly mortgage, known as a "bike" in the industry. (Little known fact: I used to be a mortgage loan officer, my sister was an underwriter, and my father was in the mortgage biz for his entire career in both the primary and secondary markets.)
Paying your mortgage every two weeks can save you SERIOUS money--seven years' interest on a 30-year mortgage. For instance, on a $100,000 30-year loan at 7% (that's high for current rates, but bear with me), you would normally pay interest of $139,508.90 over 30 years. Paying on a "bike" would save you $34,462.64 over the life of the loan--and you'd pay your loan off in less than 24 years.
Keep in mind that there is also the "bi-monthly" plan, which is NOT the same as a "bike." Paying twice a month, as opposed to every two weeks, reduces your total interest by only one month, instead of seven years!
Here's what About.com's financial planning guide advises to get yourself a "bike":
- Check with your lender or read the fine print of your mortgage document to make sure there's no penalty for pre-payment.
- Ask your lender how they'll treat your bi-weekly payments (apply each payment immediately to the principal or wait for the second half of the payment to arrive?).
- Whenever you include additional money in your payment, make sure you include a note that it is to be applied to the principal, not to the next month's payment.
- Check on your lender to make sure the extra payments are being applied to your principal. If you're making bi-weekly payments, it's easy to determine what your principal balance should be; just plug your mortgage amount and interest rate into Bankrate's Bi-Weekly Mortgage Payment Calculator.
It may be that paying your mortage every two weeks doesn't make financial sense for you--for instance, if you only get paid once a month. And we're with a credit union; they're giving us the benefit of the "bike" and still showing us as a month ahead. Not all financial institutions will do it that way.
Run your numbers, and see if it wouldn't be easier on your cash flow to move to a "bike" schedule. I'm betting that you'll get the same results that we did: It makes all the sense in the world.