If you are a homeowner with a conventional mortgage who makes monthly payments on your home, you may have heard about biweekly mortgage payment programs as an alternative to traditional payment plans.
The way to do this is by paying biweekly mortgage payments versus monthly payments. The logic is that increasing the frequency of the payments reduces the interest that builds up and, over the course of a 30- or 15-year mortgage, that can equal years of payments eliminated from your loan.
Before you sign up for these biweekly payments, it may be wise to examine if this logic is actually true and will save you money.
Key Takeaways
- Some biweekly payment programs offered by lenders are not the best financial choice for the homeowner.
- Committing to biweekly mortgage payments can be difficult on a tight budget.
- Biweekly mortgage payments do not necessarily improve your credit score.
- Making additional paymentstowards the principalof your mortgage is a way to reduce your interest payments over the life of the loan.You don't need a formal agreement to do this.
- In any case, make sure your mortgage doesn't come with an early prepayment penalty. That will damage any strategy for paying off the loan early.
Will Switching to Biweekly Payments Boost My Credit Score?
Some people believe that making biweekly payments improves their credit, but this is a myth, according to experts.
Using a biweekly payment schedule set up by your mortgage lender puts you on an automatic withdrawal plan that assures that your payments are made on time.
If you're the type of person who misses payments from time to time because you forgot to write the check, an automatic payment schedule will improve your credit because your payments will be on time. But you can get the same advantage with an automatic monthly payment.
Will Biweekly Payments Reduce the Interest I Pay?
This may be a myth. Why? Because, depending on the particulars of your loan, there is a good chance that the company receiving your mortgage payment isn't the company that holds the loan.
Although you're paying twice per month, the servicer receiving your payment isn't making biweekly payments to the company that owns your loan. It's more likely that they're likely holding the payment in an account until the end of the month.
But will you still be reducing the interest that is building up over time? Yes. Remember that each calendar year has 52 weeks. If each month has four weeks that equals 48 weeks. So, biweekly payments don't consist of two payments each month but rather add up to 26 half payments—the equivalent of 13 monthly payments in a year.
Ask in Advance
Some mortgage companies don't accept biweekly payments on mortgages, so you should ask ahead of time before signing up for a biweekly payment plan through a third-party lender.
How Does the Math Work on Biweekly Mortgage Payments?
It works like this: Biweekly payments are equal to 13 monthly payments in a year while traditional monthly payments are equal to 12 payments each year.
By paying an extra month every year, you're paying extra principal, which shaves six to eight years off the life of the loan over time.
But do you have to make biweekly payments to do that? Instead, you could divide the total of one month's payment by 12 and add that amount to your monthly mortgage payment.
If you're paying $1,500 per month, divide 1,500 by 12 and make your monthly payment $1,625. Talk to your mortgage company first to make sure there isn't something more you have to do to make sure the extra money is applied to the principal amount of your loan.
What's Wrong with Biweekly Mortgage Payments?
There are potentially two problems with going with a lender's biweekly payment program:
- There are often fees attached to this payment plan. That eats into the amount you're saving by accelerating your repayment schedule.
- You may, like most American consumers, already have enough contractual payment obligations in your life. Unless you have significant financial reserves, you might want to keep some flexibility in your budget rather than committing to biweekly payments.
Remember, you can always make an extra payment when you get three paychecks in a month, receive a tax refund, or come into a windfall. You don't have to contractually obligate yourself to do it every month.
Why Are Biweekly Mortgage Payments a Good Idea?
There are a couple of benefits to biweekly mortgage payments. They include:
- Paying off your mortgage faster, and paying less interest over the life of the loan.
- Building equity in your home faster.
What Are the Downsides of Biweekly Mortgage Payments?
Signing a formal agreement to make biweekly mortgage payments has a couple of potential downsides:
- There are often fees involved and they will eat into the amount you're saving by increasing your annual mortgage payment.
- You're locking yourself into a commitment to pay a larger amount every year. If your budget takes a hit from another direction, you could regret that.
What Are Other Ways I Can Pay Down My Mortgage Faster and Cheaper?
You can pay off your mortgage earlier and reduce your interest costs without committing to a biweekly mortgage payment. For example, you can use a bonus or an unexpected windfall to pay off a chunk of your mortgage. If you get a tax refund, put the money against your mortgage.
Whatever you do, make sure that you contact your mortgage holder in advance and make sure that your extra payment will be applied against the principal of your mortgage loan.
The Bottom Line
There are ways to pay down a mortgage without signing up for a plan that may come with fees attached. The benefits may not outweigh the gains of a biweekly mortgage.
If you are considering a biweekly payment program to lower your mortgage, it may be wise to investigate whether the plan available through your bank or mortgage service provider works for your budget.
FAQs
If done right, making biweekly mortgage payments leads to less interest paid over the life of your loan, saving you money and whittling your balance down sooner. However, you must confirm that the extra payments are being applied to the principal and that you're not subject to prepayment penalties.
Is it worth it to pay a mortgage biweekly? ›
When you make biweekly payments, you could save more money on interest and pay your mortgage down faster than you would by making payments once a month. When you decide to make biweekly payments instead of monthly payments, you're using the yearly calendar to your benefit.
How much faster will I pay off my mortgage with biweekly payments? ›
That partly depends on the interest rate — but on a 30-year mortgage loan with a 7% interest rate, making your mortgage payments biweekly would allow you to pay off your loan seven years faster than with traditional monthly payments.
How much do biweekly payments shorten a 30 year mortgage? ›
Bi-weekly payments will save you 19,834 in interest, and will reduce the term of your loan from 30 years to 26.1 years. Pay off your home 4 years earlier with bi-weekly payments. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
What happens if I pay 3 extra mortgage payments a year? ›
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
What happens if I pay my mortgage every two weeks? ›
If done right, making biweekly mortgage payments leads to less interest paid over the life of your loan, saving you money and whittling your balance down sooner. However, you must confirm that the extra payments are being applied to the principal and that you're not subject to prepayment penalties.
How many years can you save on your mortgage by paying biweekly? ›
Pro 1: Pay Off Your Mortgage Faster
But if you make biweekly mortgage payments, you will be making what equates to 13 monthly payments each year. Assuming a 6.5% interest rate and biweekly payments of $252, you would pay off your mortgage in a little over 24 years, or about six years early.
What happens if I pay an extra $1000 a month on my mortgage? ›
Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
How do biweekly payments affect mortgage? ›
Each year, the biweekly method adds one extra month's payment that's applied to your mortgage principal, helping you shave years off your mortgage repayment. In fact, biweekly payments can potentially help you pay off your mortgage 6 – 8 years sooner than planned.
How much will I save making biweekly payments? ›
How the homeowner makes their mortgage payments can save a lot of money over the life of the loan. Tens of thousands of dollars can be saved by making bi-weekly mortgage payments and enables the homeowner to pay off the mortgage almost eight years early with a savings of 23% of 30% of total interest costs.
Increasing your monthly payments, making bi-weekly payments, and making extra principal payments can help accelerate mortgage payoff. Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster.
How fast can you pay off a 30-year mortgage with two extra payments a year? ›
By making 2 additional principal payments each year, you'll pay off your loan significantly faster: Without extra payments: 30 years. With 2 extra payments per year: About 24 years and 7 months.
Does a 30-year mortgage actually take 30 years? ›
For example, with a 30-year loan, if you make your payments on time, you will have paid back the full loan amount, plus interest, in 30 years. Once your loan term is set, you'll get an amortization schedule from your mortgage lender.
What happens if I pay $500 extra a month on my mortgage? ›
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment.
What happens if I pay an extra $200 a month on my 15 year mortgage? ›
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000. Another way to pay down your mortgage in less time is to make half-monthly payments every 2 weeks, instead of 1 full monthly payment.
When should you not pay extra on a mortgage? ›
You have high-interest debt.
Rather than make extra payments toward your mortgage principal, consider paying down high-interest debt first. This can include credit card, student loan, medical, and car loan debt, just to name a few.
How many paychecks should your mortgage be? ›
The 28% mortgage rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (e.g., principal, interest, taxes and insurance).
Is it better to overpay mortgage weekly or monthly? ›
If your interest rate is reviewed and perhaps amended on a daily basis, then there isn't really an ideal time to make overpayments. You can do so whenever you wish. But if it's calculated monthly or even annually, then you may want to consider overpaying on your mortgage just before the interest is re-evaluated.
Which is better biweekly or semi monthly mortgage payments? ›
Since you're making two extra payments per year with a biweekly plan, you'll pay your loan off much quicker than with a bimonthly plan. For example, a $250,000 30-year loan with a 4.1% rate paid off biweekly will pay off the mortgage four years early with a savings of almost $30,000 in interest.
