Biweekly Mortgage Payments: Are They A Good Choice For You?

A mortgage is one of the biggest debts you’ll have in your lifetime. While you may be working toward tackling credit debt, a car loan, student loans or all the above, the balance of your mortgage may be a little harder to chip away at.

If you’re motivated, you can make an additional mortgage payment yearly. One way to do this is by making biweekly mortgage payments. This means you’ll make an extra payment each year that could potentially pay your mortgage off several years earlier.

However, take a moment to consider whether this plan is feasible for you. Many factors go into biweekly mortgage payments, so it’s important to know what they are and how they can impact your finances before making the switch.

What Are Biweekly Mortgage Payments?

A biweekly mortgage payment is a mortgage option where you make half a month’s payment every two weeks instead of the more traditional method of making 12 monthly payments in full every year. 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 may help you pay off your mortgage 6 – 8 years sooner than planned.

How Do Biweekly Mortgage Payments Work?

Biweekly payments are half of your monthly payment paid every 2 weeks. Because a year has 52 weeks, this works out to 26 biweekly payments. Since these payments are half the full amount of your monthly mortgage, they equate to 13 full payments.

Biweekly mortgage payments save you money by adding one principal-only payment per year. The reason making biweekly payments lowers your overall interest is because this method pays the principal balance faster, therefore, there’s less money that can be charged interest. Choosing this method could remove several years’ worth of interest payments.

The Math Behind Biweekly Mortgage Payments

Using real numbers, let’s take a look at how much you’ll save in interest when you use a biweekly repayment schedule.

Let’s say you purchased a home for $200,000 with a 30-year fixed-rate loan. You put down $40,000 (20%) and have an interest rate of 4%. Your monthly mortgage payment is $764, which pays your principal and interest. If you make monthly payments for the life of the loan, by the time your mortgage is paid off, you’ll have paid a total of $274,991 on the loan, thanks to interest.

Now, let’s say you decide to make biweekly payments instead. With this payment method, you pay $382 (half your monthly payment) every two weeks. If you make biweekly payments for the life of the loan, once your mortgage is paid off, you’ll have paid a total of $256,288 on the loan, and you’ll pay off your mortgage in 25 years and 9 months (cutting 4 years and 3 months of payments off your mortgage).

Biweekly Vs. Monthly Mortgage Payments

As you can see from the example above, biweekly and monthly payments have some big differences: the number of payments you make, how long it takes to pay off your mortgage and the amount of money you end up paying on the loan.

The number of payments you make each year affects how long and how much you pay over the course of your mortgage. By making one extra full payment every year, biweekly payments pay off your mortgage faster than monthly payments, ultimately saving you more money.

A monthly payment plan allows for 12 full payments each year (one every month). A biweekly plan equates to 13 full payments each year (or 26 biweekly half payments).

How To Set Up Biweekly Mortgage Payments

If you want to set up biweekly mortgage payments with your lender or loan processor, use the steps below as a guide:

• Contact your loan servicer: The process starts by getting in touch with your loan servicer. Find out if they have an automated payment option.
• Set up your automatic payments: If possible, automatic biweekly payments make it easier to stay on top of your chosen payment schedule. Rocket Mortgage^® clients can set up automatic biweekly payments for free.
• Manually make payments when necessary: In some cases, lenders won’t allow an automated bi-weekly mortgage payment. If this applies to your mortgage, plan to make biweekly payments manually. Consider setting up a calendar reminder to avoid forgetting when you need to make a payment.

After you set up your biweekly payments, you can watch your mortgage balance fall ahead of schedule.

Pros And Cons Of Biweekly Mortgage Payments

Paying your mortgage biweekly has its benefits, but it also comes with a few disadvantages. Consider these pros and cons before deciding which payment option is right for you.

Pros

• Pay off your mortgage faster: A biweekly repayment schedule can help you pay off a mortgage early by several years.
• Pay less in interest over time: Biweekly payments can contribute one extra full payment on your principal balance per year and cut down on accumulating interest.
• Build equity faster and cancel PMI: Biweekly payments build up your home equity. If you have a conventional loan, you can request to drop your private mortgage insurance (PMI) payments once you have 20% equity in the home. This will save you more money each month.
• Simplifies your budget: This payment plan could make personal budgeting easier, especially if you’re paid biweekly for your job.

Cons

• Less funds for housing expenses: The extra payment toward your mortgage per year can be tough if you’re on a tight budget. If you’re living paycheck to paycheck, that extra payment might be better spent elsewhere.
• Additional processing fees: Your mortgage lender may charge a setup fee, as well as transactional fees. If your lender doesn’t offer biweekly mortgage payments, third-party payment processors may also charge extra fees (more on this below).
• Lender prepayment penalties: Some mortgage lenders have a prepayment penalty, meaning you could get charged for paying your mortgage off early.
• Failure to reap the full benefits of biweekly payments: Some lenders or processors still only apply your payments once a month, even though you’re paying twice or more a month. As a result, you won’t save as much in interest, because the payments won’t be immediately processed.
• Delay in payment application: Even if you make additional payments, some lenders or loan processors may apply the payments once a month, thus interest still applies. Speak to a representative to better understand how payments are applied before you start making biweekly payments.

Beware Of Third-Party Processors

Thanks to technology, you should be able to easily set up a biweekly mortgage payment on your lender’s website. Nonetheless, some lenders use third-party processors who charge a fee for this service. Make sure you understand all of the fees and penalties before you start making additional payments.

Alternatives To Biweekly Mortgage Payments

You have other choices if you’re not certain you have the financial wherewithal to commit to biweekly payments. Let’s explore some of them.

Bimonthly Mortgage Payments

Bimonthly mortgage payments differ from biweekly payments because you’re making a payment twice per month, which equates to 24 bimonthly payments or 12 full payments total – the same number as the monthly option.

It may be convenient to set up automatic bimonthly mortgage payments if you get paid twice a month, but your principal mortgage balance at year’s end won’t be any lower than it would be with traditional monthly payments.

Additional Principal-Only Mortgage Payment

Another option is making one principal-only payment during the year. This option may be less burdensome because you can save the month for the additional payment over time. Make sure you speak with your lender before making this additional payment to ensure that it’s applied to the principal, not your accrued interest or into your escrow account.

A Rate-And-Term Refinance

If you’re a few years into repaying your mortgage, a rate-and-term refinance can help you move from a 30- to a 15-year fixed loan while lowering your interest rate. It’s a refinance, so you’ll have some associated costs, but rate-and-term refinances tend to be less costly than cash-out refinances.

The Bottom Line: Biweekly Mortgage Payments Can Be Worth It

Biweekly payments are a mortgage payment option that can allow you to make an extra full payment each year. This can help you pay off your mortgage earlier and reduce the amount you pay in interest in the long run by thousands of dollars.

Want to work toward a debt-free life? Check out our tips for paying off your mortgage early.