What's the catch with biweekly mortgage payments?
When you pay monthly, you're making 12 payments / year. Assuming you have a payment of $1000/mo, that's $12,000/year that you're paying for your mortgage. When you opt for bi-weekly, they're saying that you can pay half of your mortgage ($500) bi-weekly (can be configured to align with your paycheck). Since there are ~26 bi-weekly periods in a year, you're making 26 * $500 = $13,000 in mortgage payments each year. Some of these companies charge a fee for you to utilize this service. The main concept behind this is that people are horrible at budgeting on their own, so when $500 is immediately taken from your paycheck, you'll be able to budget around what's left and be able to make that extra payment each year without thinking about it or realizing it. So the principle is true.  Assuming that you get paid bi-weekly, you end up getting three paychecks two months during the year.  Typically that is in January and July/August.  So if things were different, and your mortgage was setup so you paid half a monthly payment each paycheck, then you would wind up making one full extra payment per year.  Making that extra payment, most often, reduces the mortgage by 7 years on a 30 year note.   While true, many of these companies charge exorbitant fees for the right for you to do so, so the principal reduction is not commensurate with what you are paying.   You can simply do this yourself without paying fees.  On those extra pay days, pay half a payment to principal only, and no fee, no fuss.  This is pretty easy to do with most mortgage companies as they have online payments and it is just a matter of filling out a web form.  For me this does not even cost a stamp as they pull from my checking account at another bank. "Pete and Noah addressed the math, showing how this is, in effect, converting a 30yr to a ~23yr mortgage, at a cost, plus payment about 8% higher (1 extra payment per year). No magic there. The real issue, as I see it, is whether this is the best use of the money. Keep in mind, once you pay extra principal, which in effect is exactly what this is, it's not easy to get it back. As long as you have any mortgage at all, you have the need for liquidity, enough to pay your mortgage, tax, utilities, etc, if you find yourself between jobs or to get through any short term crisis.  I've seen people choose the ""sure thing"" prepayment VS the ""risky"" 401(k) deposit. Ignoring a match is passing up a 50% or 100% return in most cases. Too good to pass up.  2 points to add - I avoided the further tangent of the tax benefit of IRA/401(k) deposits. It's too long a discussion, today's rate for the money saved, vs the rate on withdrawal. Worth considering, but not part of my answer. The other discussion I avoid is Nicholas' thoughts on the long term market return of 10% vs today's ~4% mortgage rate. This has been debated elsewhere and morphs into a ""pre-pay vs invest"" question." "Making extra principal payments will reduce the term of your loan. I wouldn't sign up for a biweekly schedule, just do it yourself so you have more flexibility. A simple spreadsheet will allow you to play ""What if?"" and make it clear that extra principal payments are most effective early in the term of the loan. My wife and I paid off our home in less than 10 years with this approach. Some will say that the opportunity costs of not using that money for something else outweighs the gains. I would say that not having a mortgage has a positive impact on your cash flow and your assets (you own the home), which combine to create more opportunity, not less. That being said, It should be obvious that paying off higher interest debt first is the priority, (Paying off a zero percent interest car loan early is just foolish)" Another thing to consider is that paying extra principal (either via one of these services, or by including something extra with your normal mortgage payment and designating that it go to principal rather than be held to reduce next month's payment, or just sending an additional payment to the bank and designating it as reducing the principal) shortens the term of your loan. Is this good? Maybe. Consider that banks lend with a variety of terms. Usually the 15-year fixed rate mortgage has a lower interest rate than the 30-year fixed-rate mortgage, and the 5-year home-equity-loan has an even lower rate. When you prepay your loan, your interest rate stays the same, but the bank gets its money back sooner. This makes more profit for the bank as it can then invest the money in other things. That profit could have been yours if you had made that investment instead of prepaying your mortgage. I'll preface this with saying that I'm not a finance or real estate professional, this is just how I understand the situation and what I'm doing:  We just got a 30year/FHA mortgage, there's no prepayment penalty, and no fees associated with paying it biweekly. In fact (Wells Fargo), while the payments get withdrawn biweekly, they don't actually post to the mortgage until there's enough for a full payment.  So essentially here are the benefits I'm realizing: Interest is a fee that you pay in order to use someone else's money. Once you've made the deal, pretty much anything you do that reduces the total interest that you pay does so by reducing the time for which you get to use their money. As an extreme example, consider a thirty-year interest-only loan, with a balloon payment at the end. If you pay it off after fifteen years you pay half as much interest because you had the use of the money for half as long. The same thing happens when you make biweekly payments: you reduce the total interest that you pay by giving up the use of some of the borrowed money sooner. That's not necessarily bad, but it's also not automatically good. Depending on who you have the loan through and how they figure the interest charges (whether daily, monthly, bi-monthly, etc. normally monthly I would assume), your interest is probably figured either daily or once a month.   Let's assume that it is figured daily, otherwise it wouldn't make sense to make bi-weekly payments.   At 4% Annual Interest on a $150,000 home loan the interested added each day is about $16.44, but it doesn't stop there because it is compounding interest daily so the next day it becomes 4% of 150,0016.44 (which is negligibly larger amount) and they will tack on another $16.44. So what will happen is that the amount of interest you owe grows rather quickly, especially if you miss a monthly payment.  Everyone knows that the faster you pay something off the less interest you pay, but not everyone knows the formula for compounding interest.  a quick Google search rendered this site with a simple explanation Compound Interest Formula  unfortunately this formula doesn't take into account the payments being made. The big thing with making your payments bi-weekly rather than a bigger payment once a month is that you pay off some of that principle right away and it won't collect interest for 14 more days. if the interest is only calculated once a month, make your full payment before the interest is calculated, the same goes for your credit cards.
"We’re buying the home right over $200,000 so that means he will only need to put down (as a ‘gift’) roughly $7000. I'm with the others, don't call this a gift unless it is a gift.   I'd have him check with the bank that previously refused him a mortgage if putting both of you on a mortgage would allay their concerns.  Your cash flow would be paying the mortgage payment and if you failed to do so, then they could fall back on his.  That may make more sense to them, even if they would deny each of you a loan on your own.  This works for them because either of you is responsible for the whole loan.  It works for him because he was already willing to be responsible for the whole loan.  And your alternative plan makes you responsible for the whole loan, so this is just as good for you.   At what percentage would you suggest splitting ownership and future expenses? Typically a cash/financing partnership would be 50/50, but since it’s only a 3.5% down-payment instead of 20% is that still fair? Surprisingly enough, a 3.5% down-payment that accumulates is about half the equity of a 20% down-payment.  So your suggestion of a 25%-75% split makes sense if 20% would give a 50%-50% split.   I expected it to be considerably lower.  The way that I calculated it was to have his share increase by his equity share of the ""rent"" which I set to the principal plus interest payment for a thirty year loan.  With a 20% down-payment, this would give him 84% equity.  With 3.5%, about 40% equity.  I'm not sure why 84% equity should be the equivalent of a 50% share, but it may be a side effect of other expenses.  Perhaps taking property taxes out would reduce the equity share.   Note that if you increase the down-payment to 20%, your mortgage payment will drop substantially.  The difference in interest between 3.5% and 20% equity is a couple hundred dollars.  Also, you'll be able to eliminate any PMI payment at 20%.   It could be argued that if he pays a third of the monthly mortgage payment, that that would give him the same 50% equity stake on a 3.5% down-payment as he would get with a 20% down-payment.  The problem there is that then he is effectively subsidizing your monthly payment.  If he were to stop doing that for some reason, you'd have what is effectively a 50% increase in your rent.  It would be safer for you to handle the monthly payment while he handles the down-payment.   If you couldn't pay the mortgage, it sounds like he is in a position to buy out your equity, rent the property, and take over the mortgage payment.  If he stopped being able to pay his third of the mortgage, it's not evident that you'd be able to pick up the slack from him much less buy him out.  And it's unlikely that you'd find someone else willing to replace him under those terms.  But your brother could construct things such that in the face of tragedy, you'd inherit his equity in the house.  If you're making the entire mortgage payment, that's a stable situation.   He's not at risk because he could take over the mortgage if necessary.  You're not at risk because you inherit his equity share and can afford the monthly payment.  So even in the face of tragedy, things can go on.  And that's important, as otherwise you could lose your equity in the house." "I'm impressed.  She must have a substantial income to agree to a $500/month car payment.  I imagine her income is about 20K per month for that to make sense.  What kind of work does she do?  To answer your question, typical lease do not work the way you describe.  Paying an extra $2000 will allow you to skip 4 payments (provided the payments were exactly $500) any time in the future.  It does not modify the terms of the lease which would include the payment amount.  Also one does not receive a fiance charge reduction benefit as with a loan.  Essentially you are providing a loan to the leasing company for free. To be explicit you cannot tell the mortgage company anything as she is applying for the loan, not you.  She can tell the mortgage company the new payment is $400, but she would be falsifying the application which is not advisable. Perhaps the mortgage company is doing her a favor.  They are indicating her life is out of control financially.  Either she is attempting to purchase way to much home or her consumer debt is out of control.  It could be a combination of both.   My first paragraph was written to be ""tongue in check"" in order to demonstrate absurdity.  Without a substantial income and an substantial net worth, a 500/month car payment is simply ridiculous.  While it is someone average, when you compare it to the average income (~54K/year) you understand why 78% of US households live paycheck-to-paycheck (are broke), and have no retirement savings. For your and her sake, please stop giving all your hard earned money to banks." "Assuming you've got no significant prepayment penalty, I would think about getting a longer mortgage, but making payments like it was a shorter mortgage. This will get the mortgage paid off in a shorter time period - but if you run into financial difficulties and/or find a better use for your money, you can drop back to paying the minimum necessary to retire the loan in 30 years without needing to refinance. (If you need to reduce your payments because you're between jobs, you don't have a very good negotiating position).  For the most part, there's nothing that says you can only make one payment per month, or that it must be in the amount printed on the statement. If you want to, you can make payments weekly (or biweekly, or every 4 weeks) which typically means that you'll pay more every year. If your mortgage payments are $1000/month, that's $12,000 per year. If you tell yourself that 1000/month = $250 weekly and make yourself send a payment every week (or 500 every 2 weeks), you'll end up paying 250 * 52 = $13,000 per year, without particularly feeling the difference, especially if you get paid on a weekly/biweekly schedule instead of monthly or semi-monthly. Also, by paying more often, you're borrowing a tiny bit less money over the course of the year (because the money didn't sit in your account waiting until the 1st of the month to make a payment) so you save a little in interest there, too.  Think of ""30 years"" or ""10 years"" as the basis for a minimum payment schedule, not necessarily the length of time that you or the lender really intend to keep the loan." "Concise answers to your questions: Depends on the loan and the bank; when you ""accelerate"" repayment of a loan by applying a pre-payment balance to the principal, your monthly payment may be reduced. However, standard practice for most loan types is that the repayment schedule will be accelerated; you'll pay no less each month, but you'll pay it off sooner. I can neither confirm nor deny that an internship counts as job experience in the field for the purpose of mortgage lending. It sounds logical, especially if it were a paid internship (in which case you'd just call it a ""job""), but I can't be sure as I don't know of anyone who got a mortgage without accruing the necessary job experience post-graduation. A loan officer will be happy to talk to you and answer specific questions, but if you go in today, with no credit history (the student loan probably hasn't even entered repayment) and a lot of unknowns (an offer can be rescinded, for instance), you are virtually certain to be denied a mortgage. The bank is going to want evidence that you will make good on the debt you have over time. One $10,000 payment on the loan, though significant, is just one payment as far as your credit history (and credit score) is concerned. Now, a few more reality checks: $70k/yr is not what you'll be bringing home. As a single person without dependents, you'll be taxed at the highest possible withholdings rate. Your effective tax rate on $70k, depending on the state in which you live, can be as high as 30% (including all payroll/SS taxes, for a 1099 earner and/or an employee in a state with an income tax), so you're actually only bringing home 42k/yr, or about $1,600/paycheck if you're paid biweekly. To that, add a decent chunk for your group healthcare plan (which, as of 2014, you will be required to buy, or else pay another $2500 - effectively another 3% of gross earnings - in taxes). And even now with your first job, you should be at least trying to save up a decent chunk o' change in a 401k or IRA as a retirement nest egg. That student loan, beginning about 6 months after you leave school, will cost you about $555/mo in monthly payments for the next 10 years (if it's all Stafford loans with a 50/50 split between sub/unsub; that could be as much as $600/mo for all-unsub Stafford, or $700 or more for private loans). If you were going to pay all that back in two years, you're looking at paying a ballpark of $2500/mo leaving just $700 to pay all your bills and expenses each month. With a 3-year payoff plan, you're turning around one of your two paychecks every month to the student loan servicer, which for a bachelor is doable but still rather tight. Your mortgage payment isn't the only payment you will make on your house. If you get an FHA loan with 3.5% down, the lender will demand PMI. The city/county will likely levy a property tax on the assessed value of land and building. The lender may require that you purchase home insurance with minimum acceptable coverage limits and deductibles. All of these will be paid into escrow accounts, managed by your lending bank, from a single check you send them monthly. I pay all of these, in a state (Texas) that gets its primary income from sales and property tax instead of income, and my monthly payment isn't quite double the simple P&I. Once you have the house, you'll want to fill the house. Nice bed: probably $1500 between mattress and frame for a nice big queen you can stretch out on (and have lady friends over). Nice couch: $1000. TV: call it $500. That's probably the bare minimum you'll want to buy to replace what you lived through college with (you'll have somewhere to eat and sleep other than the floor of your new home), and we're already talking almost a month's salary, or payments of up to 10% of your monthly take-home pay over a year on a couple of store credit cards. Plates, cookware, etc just keeps bumping this up. Yes, they're (theoretically) all one-time costs, but they're things you need, and things you may not have if you've been living in dorms and eating in dining halls all through college. The house you buy now is likely to be a ""starter"", maybe 3bed/2bath and 1600 sqft at the upper end (they sell em as small as 2bd/1bt 1100sqft). It will support a spouse and 2 kids, but by that point you'll be bursting at the seams. What happens if your future spouse had the same idea of buying a house early while rates were low? The cost of buying a house may be as little as 3.5% down and a few hundred more in advance escrow and a couple other fees the seller can't pay for you. The cost of selling the same house is likely to include all the costs you made the seller pay when you bought it, because you'll be selling to someone in the same position you're in now. I didn't know it at the time I bought my house, but I paid about $5,000 to get into it (3.5% down and 6 months' escrow up front), while the sellers paid over $10,000 to get out (the owner got married to another homeowner, and they ended up selling both houses to move out of town; I don't even know what kind of bath they took on the house we weren't involved with). I graduated in 2005. I didn't buy my first house until I was married and pretty much well-settled, in 2011 (and yes, we were looking because mortgage rates were at rock bottom). We really lucked out in terms of a home that, if we want to or have to, we can live in for the rest of our lives (only 1700sqft, but it's officially a 4/2 with a spare room, and a downstairs master suite and nursery/office, so when we're old and decrepit we can pretty much live downstairs). I would seriously recommend that you do the same, even if by doing so you miss out on the absolute best interest rates. Last example: let's say, hypothetically, that you bite at current interest rates, and lock in a rate just above prime at 4%, 3.5% down, seller pays closing, but then in two years you get married, change jobs and have to move. Let's further suppose an alternate reality in which, after two years of living in an apartment, all the same life changes happen and you are now shopping for your first house having been pre-approved at 5%. That one percentage point savings by buying now, on a house in the $200k range, is worth about $120/mo or about $1440/yr off of your P&I payment ($921.42 on a $200,000 home with a 30-year term). Not chump change (over 30 years if you had been that lucky, it's $43000), but it's less than 5% of your take-home pay (month-to-month or annually). However, when you move in two years, the buyer's probably going to want the same deal you got - seller pays closing - because that's the market level you bought in to (low-priced starters for first-time homebuyers). That's a 3% commission for both agents, 1% origination, 0.5%-1% guarantor, and various fixed fees (title etc). Assuming the value of the house hasn't changed, let's call total selling costs 8% of the house value of $200k (which is probably low); that's $16,000 in seller's costs. Again, assuming home value didn't change and that you got an FHA loan requiring only 3.5% down, your down payment ($7k) plus principal paid (about another $7k; 6936.27 to be exact) only covers $14k of those costs. You're now in the hole $2,000, and you still have to come up with your next home's down payment.  With all other things being equal, in order to get back to where you were in net worth terms before you bought the house (meaning $7,000 cash in the bank after selling it), you would need to stay in the house for 4 and a half years to accumulate the $16,000 in equity through principal payments. That leaves you with your original $7,000 down payment returned to you in cash, and you're even in accounting terms (which means in finance terms you're behind; that $7,000 invested at 3% historical average rate of inflation would have earned you about $800 in those four years, meaning you need to stick around about 5.5 years before you ""break even"" in TVM terms). For this reason, I would say that you should be very cautious when buying your first home; it may very well be the last one you'll ever buy. Whether that's because you made good choices or bad is up to you." "If I had to guess (since you provided little information about your loan repayment), I'd guess that you're on the ""Extended"" repayment plan for your $72k loan, and the ""Standard"" plan for your $30k loan. In general, there are 4 main kinds of student loan repayment plans This holds true for federal loans (Direct/Stafford/PLUS). Private loans may not have all of these options, or they may have more. Running your numbers, I get 300 payments of $500/mo at 6.8% interest for a $72,000 loan, and 120 payments of $345/mo at 6.8% interest for a $30,000 loan. Now, to address your issue of interest vs principal, you should notice that each month you pay, the interest payment is slightly lower, and the principal slightly higher. And if you make bi-weekly payments, you'll see that change a LITTLE bit more quickly (slightly smaller balance accruing interest for 14 days of the month) and you'll also pay slightly less over time." An amortization schedule is often used to produce identical payments for the term (repayment period) of a loan, resulting in the principal being paid off and the debt retired at the end of the loan. This is in contrast to an interest only, or balloon loan. These loans require little or no payment against the balance of the loan, requiring the loan to be paid indefinitely if there is no term, or requiring the loan to be entirely paid off from cash or a new loan at the end of the term. A basic amortization formula can be derived from the compound interest formula:   This formula comes from the Wikipedia article on amortization. The basics of the formula are the periodic payment amount, A (your monthly payment), can be determined by the principal loan, P, the rate, r, and the number of payments, n.  Lenders lend money to make a profit on the interest. They'd like to get back all the money they lent out. Amortization schedules are popular because the fixed low payments make it easier for borrowers to pay the loan off eventually. They also tend to be very profitable for lenders, especially at the start of the term, because they make a lot of profit on interest, just like the start of your mortgage. The principal of a mortgage has more meaning than the principal of a revolving debt credit card. The mortgage principal is fixed at the start, and represents the value of the collateral property that is your home. You could consider the amount of principal paid to be the percentage of your home that you actually own (as part of your net worth calculation).  A credit card has a new balance each month depending on how much you charge and how much you pay off. Principal has less meaning in this case, because there is no collateral to compare against, and the balance will change monthly. In this case, the meaning of the amortization schedule on your credit card is how long it will take you to pay off the balance if you stop charging and pay at the proscribed payment level over the term described. Given the high interest rate on credit cards, you may end up paying twice as much for goods in the long run if you follow your lenders schedule. Amortizing loans are common for consumer loans, unless a borrower is seeking out the lowest possible monthly payment. Lenders recognize that people will eventually die, and want to be paid off before that happens. Balloon and interest only bonds and loans are more commonly issued by businesses and governments who are (hopefully) investing in capital improvements that will pay off in the long run. Thousands of people and businesses have gone bankrupt in this financial crisis because their interest only loans reached term, and no one was willing to lend them money anymore to replace their existing loan. What's going on here is that the variable rate loan is transferring some of the risk from the bank to you.  In a reasonable deal taking on risk brings with it reward.  It's the same thing as deductibles on insurance--they're transferring some risk to you and thus your expected total cost goes down. Thus the proper evaluation of such deals is whether you can afford the outcome if you draw the short straw.  If you feel you can afford the highest payment that can result then the variable rate is a good deal.  If you're near your limit then stay with the safe option of the fixed rate. For a house this is easy enough to evaluate--run the calculations assuming the highest payment and see what the debt-to-income ratio is.  Note that when we were getting mortgages there was another factor involved: the variable rate loans had a higher initiation cost.  Combined with the very low difference between fixed and ARM rates at the time we went fixed but given the rates you quote going variable would have been a no-brainer for us. I bought a house 6 months ago for $240,000 on an $80k salary am getting by just fine and am able to save money (and I live on Long Island, an extremely expensive area to live). I would look at finding a few more interest rate quotes; for instance, Wells Fargo is offering 4.25% right now for FHA (first time home buyers) loan (which only require 3.5% down). A lower interest rate will lower your monthly payment. Make the banks compete with one another - this little bit of leg-work will save you thousands upon thousands of dollars in the long run). Also, try to negotiate to NOT paying a point down on the mortgage - most of the time they are bull, especially in this economy (banks are desperate for new loans).  However, as others have said, do not assume or count on rent coming in to be able to afford your mortgage (unless you are married). What if your friend moves out and you cannot find another tenant?  However, I strongly recommend you talk to a financial adviser and your bank mortgage loan officer to work out the numbers - you will be surprised what you can afford when you factor in your income tax and mortgage interest write-offs.