Bi-Weekly Payment Calculator
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Understanding Bi-Weekly Payments
A bi-weekly payment plan involves making a loan payment every two weeks. Since there are 52 weeks in a year, this means you'll make 26 half-payments per year. This is equivalent to making 13 full monthly payments instead of the standard 12. The extra payment per year goes directly towards the principal balance of your loan, significantly accelerating your payoff timeline and reducing the total interest paid over the life of the loan.
This strategy is particularly popular for mortgages, but can be applied to other types of loans as well. By making these slightly more frequent payments, you can often shave years off your loan term and save a substantial amount in interest.
How the Calculation Works
The formula to calculate the bi-weekly payment for a loan is derived from the standard loan amortization formula, but adjusted for the number of payments per year.
First, we determine the monthly payment (M) using the standard formula:
$M = P \left[ \frac{i(1+i)^n}{(1+i)^n – 1} \right]$
Where:
- P = Principal Loan Amount
- i = Monthly interest rate (Annual Rate / 12)
- n = Total number of payments (Loan Term in Years * 12)
Once the monthly payment (M) is calculated, the bi-weekly payment (BW) is determined by taking the monthly payment and dividing it by 2:
$BW = \frac{M}{2}$
This simplified approach assumes that your lender applies half of your monthly payment amount every two weeks, resulting in one extra monthly payment per year.
Example Calculation:
Let's calculate the bi-weekly payment for a loan with the following details:
- Loan Amount (P): $200,000
- Annual Interest Rate: 5%
- Loan Term: 30 Years
1. **Calculate Monthly Interest Rate (i):** $i = \frac{5\%}{12} = \frac{0.05}{12} \approx 0.00416667$ 2. **Calculate Total Number of Monthly Payments (n):** $n = 30 \text{ years} \times 12 \text{ months/year} = 360$ 3. **Calculate Monthly Payment (M):** $M = 200000 \left[ \frac{0.00416667(1+0.00416667)^{360}}{(1+0.00416667)^{360} – 1} \right]$ $M \approx 200000 \left[ \frac{0.00416667(4.467744)}{(4.467744) – 1} \right]$ $M \approx 200000 \left[ \frac{0.0186156}{3.467744} \right]$ $M \approx 200000 \times 0.0053682$ $M \approx \$1,073.64$ 4. **Calculate Bi-Weekly Payment (BW):** $BW = \frac{\$1,073.64}{2} = \$536.82$
Therefore, a bi-weekly payment of approximately $536.82 would result in paying off the $200,000 loan faster and saving on interest compared to making standard monthly payments.
Benefits of Bi-Weekly Payments:
- Faster Payoff: Making an extra monthly payment each year significantly shortens the loan term.
- Interest Savings: Paying down principal faster reduces the total interest paid over time.
- Improved Cash Flow: Spreading payments out more frequently can sometimes align better with bi-weekly paychecks, making budgeting easier.
Disclaimer: This calculator provides an estimate. Actual loan terms, interest calculations, and payment schedules may vary by lender. Always consult with your financial institution for precise details.