Example 15 - Biweekly Accelerated Loan

This example applies to our online demo Time Value of Money Calculator. The C-Value! program for Windows works in a similar way and has a few more features. Note, our online demo TVM calculator is limited to calculations using interest rates between 2.0% and 8.9%

Calculating loans with accelerated biweekly payments.

For greater detail about how values are entered into the TVM calculator, please see Example 1 - conventional mortgage or loan.

Background: One of the most popular conventional mortgages in the US has a thirty year term and is paid monthly. Some lenders offer a variation of this mortgage known as a biweekly mortgage. These mortgages save the borrower usually thousands of dollars in interest charges and result in the loan being paid off substantially faster. The reason these loans have gained in popularity is because the borrower notices very little difference in the payment amount. The biweekly mortgage requires that the borrower makes payments equal to one-half the monthly payment every two weeks. The result, of course, is that over the course of a year there will be twenty-six payments made (every other week or half of fifty-two weeks) which is equivalent to thirteen monthly payments.

To create a loan schedule using a biweekly accelerated technique, follow these steps.

1. Click the [New] button to clear any previous entries.
2. Set "Rounding" to "Ignore" by clicking on the "Rounding" button.

Additionally, this example assumes that, the Compute Method is set to "Normal" and the Year Length is set to 360

3. Set "Compounding" to "Monthly"
4. Enter 6.25% for the "Nominal Annual Rate"
5. Create a "Loan" event in row one of the cash flow input area

1. Set the "Date" to December 1, 2012 (mm/dd/yyyy)
2. Set the "Amount" to 375,000.00
3. Set the "# Periods" to 1

6. Move to the second row of the cash flow input area. Select "Payment" for the "Event" type

1. Set the "Date" to January 1, 2013
2. Set the "Amount" to "Unknown"
3. Set the "# Periods" to 360. This sets the TVM calculator to calculate the payment as if the payment were based on a 30-year loan

7. Calculate the unknown. The result is $2,308.94 for the regular monthly payment

NOTE: At this point you might want to view the amortization schedule via "Print Preview" and make note of the total interest paid ($456,217.88) and the date of the last payment (December 1, 2042). You can compare these to those produced with a biweekly loan after the next calculation

8. Click on the second row of the cash flow input area

1. Either click on the [Delete] button or right click and select {Delete} from the menu to delete this row
2. Reset the "Compounding Frequency" to "Biweekly"

9. Click on second row of the cash flow input area to create a new row

1. The Event will be "Payment"
2. The date will be set to Dec. 15th, 2012
3. Set the "Amount" to $1,154.47 or half the value of the monthly payment calculated in Step 7 above
4. Set the "# Periods" to "Unknown"
5. Set the "Frequency" to "Biweekly". (See note below.)

10. Calculate the unknown number of periods. The result is 632
11. View the amortization schedule. Note that the loan is paid off a little less than six years early (on February 21, 2037), and the borrower will realize just over a $100,000 savings in interest expense or about 20%

NOTE: When the amount of time between payments is equal to a compounding period there is no impact on the payoff as a result of compounding. That is, there is no additional interest as a result of unpaid interest. Thus setting the compounding to "Biweekly" when biweekly payments are made does not have a negative impact on the total amount of interest paid.

Back to the online Time Value of Money Calculator.