Calculating Life Insurance for Debt
This calculator can be used to estimate the saving a biweekly mortgage payment provides versus a typical monthly payment pattern. The calculator needs a total of three inputs, including:
- The total home mortgage value, also known as the principal of the loan
- The annual interest rate on the mortgage, which is different from as its annual percentage rate
- The loan’s term, stated in years. The drop-down list holds values ranging from ten to thirty years
The calculator then provides the user with five sets of outputs:
- The payment for both the monthly and biweekly scenarios
- The term, in months, for both the monthly and biweekly payments
- The total of all payments made under both the monthly and biweekly scenarios
- The number of months saved by using a biweekly payment pattern
- The total saved by using a biweekly payment pattern
Note: Switching to a biweekly payment pattern means the borrower is making twenty-six payments per year (not 12 months x 2, or 24 payments). While the loan will be paid off faster, the savings generated will not be equal to the number of months saved times the monthly payment since a biweekly payment pattern is closer to making thirteen monthly payments each year.
Biweekly equals Payments Every Two Weeks
The word biweekly can have two meanings. One way to interpret the term is a frequency of twice a week. The second way is how we are using it in this tool, whereby biweekly means every two weeks. Since there are fifty-two weeks in a calendar year, this calculator assumes there are twenty-six biweekly payments each year. These types of mortgage payments can help the borrower lower the overall cost of the loan two ways. Since most lending institutions are only allowed to assess finance charges on the outstanding balance of the loan, by paying on a biweekly basis, these finance charges are lowered.
The second way biweekly payments lower the cost of the loan is by accelerating the repayment of the loan. Borrowers sticking to the monthly schedule are making twelve payments per year, while borrowers on a biweekly schedule are making the equivalent of thirteen payments each calendar year; effectively accelerating the overall repayment schedule. The benefit of making biweekly payments varies with interest rates. The higher the interest rate, the greater the savings achieved by making twenty-six payments a year.
Interpreting the Results of this Calculator
The results of this calculator are broken down into three sections. The first section shows the value of each payment, the number of payments, and the total money repaid the lender over the life of the loan when making monthly payments. The second section shows the same information for a biweekly payment pattern. Finally, the last section shows the number of months saved by making biweekly payments as well as the money saved. Note that not only does the money saved increase with increasing interest rates, the number of months saved also increases. The duration, or term, of the loan also affects the results of this calculator. The longer the term, the more money and months saved too.