Should you pay your mortgage biweekly?

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Most homeowners make their mortgage payments once a month. With a biweekly mortgage payment plan, you can make half your monthly payment every two weeks.

When you do the math, this is the same as making an extra monthly payment every year through a stream of smaller, but more frequent payments. Those extra payments shave off your principal, or the actual money you borrowed, at a faster rate.

This means interest is applied to a smaller balance over the life of the loan, thereby saving you money and slashing years off your loan — but, it doesn’t always work that way, and some lenders don’t offer biweekly payments.

Here’s what you need to know about biweekly mortgage payment plans.

What does it mean to make your mortgage payment biweekly?

Most homeowners make their mortgage payments once every month. So if your monthly payment is $1,000, you’d pay $12,000 over the course of the year.

With a biweekly mortgage payment plan, you send half your mortgage payment or $500 every two weeks. There are 52 weeks in a year. So that equates to 26 payments totaling $13,000 per year. As you can see, your smaller but more frequent payments helped you pay $1,000 more over the course of a year. By taking this course, you essentially make an extra monthly payment each year. If that extra payment is applied to the loan principal, your lender charges interest on a smaller amount than it would have on a mortgage paid off monthly. So interest doesn’t build up as fast and you can pay off your loan faster.

“Anytime you can pay a little extra to lower your principal, you’ll owe less interest going forward,” explains Glenn Brunker, a mortgage executive with Ally Home. “Plus, as you pay down the principal balance, less of your payment will go to interest and more will go toward the principal — lowering it even more.

“For homeowners who receive their income on a biweekly basis, an adjusted payment schedule may better align with their monthly cash flow.”

It’s important to note that extra payments must reduce the principal in order for this strategy to work. If the extra payment isn’t applied to principal, your servicer or lender may simply hold on to your biweekly payments and then post them at the end of the month — the same as making a monthly payment.

To confirm your biweekly mortgage payment plan works the way you intend it to, make sure that:

  • Your lender allows a biweekly mortgage payment plan.
  • There are no prepayment penalties.
  • No fees are charged for setting up or maintaining a biweekly payment plan.
  • Your interest rate remains fixed for the life of the loan.
  • Extra payments are applied to principal.

How does a biweekly mortgage payment plan reduce interest paid?

Say you have a 30-year fixed-rate mortgage for $250,000 with a 4 percent interest rate. Your monthly payment would be about $1,194, and the total interest paid over the life of the loan would be $179,673.

In the same scenario, using a biweekly mortgage calculator, your total interest paid over the life of the loan on a biweekly plan is $150,450.40. That means you’d save more than $29,000, and pay off your loan in 25 years instead of 30.

This also means you’d build home equity faster. Equity represents how much of your home you actually own. It’s calculated as the difference between the appraised value of your home and your loan balance. Many lenders would let you borrow against this value. You can take out a home equity loan or home equity line of credit (HELOC) and use the cash for just about anything.

Drawbacks of a biweekly mortgage payment plan

Less money for other needs

Before you commit to a biweekly mortgage payment plan, make sure it’s beneficial to your complete financial picture. A biweekly plan often means putting more money toward your mortgage every year. This pulls money from other financial obligations like retirement savings or paying off high-interest debt.

“On the downside, paying the extra amount means a portion of your monthly money is tied up elsewhere, and without proper planning this might affect your budget and your ability to pay for other pressing financial needs besides your mortgage,” says Connie Heintz, founder and president of DIYoffer, a for-sale-by-owner toolkit. “Also, if you have already locked in a low interest rate, accelerating your mortgage might not make much of a difference; you’ll just put in more of your money toward paying the mortgage.”

Work a biweekly payment plan into your budget and see if the savings outweigh the losses seen elsewhere. A successful biweekly plan helps you pay off your loan faster than with a monthly payment plan.

Prepayment penalties

Some loans have prepayment penalties. These are fees that lenders charge when borrowers pay off their loan before its term ends or before a certain period of time. Lenders may impose prepayment penalties in several different ways, such as charging 2 to 4 percent of the principal balance or a flat fee, like $3,000.

Keep in mind that many lenders impose prepayment penalties if you pay off your mortgage within the first two years, and a biweekly payment plan generally shaves off four or five years, so a prepayment penalty may not apply. Carefully read your loan documents or contact your lender to see if you are subject to prepayment penalties.

Third-party payment plans

If your lender doesn’t offer biweekly payment plans, you may hear about a third-party company that can do it for you. Beware of these companies, as they may charge a hefty fee for setting up the plan, along with additional monthly payments, which can chip away at your savings. Or, they may charge fees and end up sending payments on a monthly basis, which would cost you even more.

How to set up a biweekly mortgage payment plan

If your lender offers biweekly payments and applies the extra payments directly to your principal, you can simply send half your mortgage payment every two weeks. If your monthly payment is $2,000, you can send $1,000 once every two weeks.

Can you pay off your mortgage early in other ways?

As long as your lender or servicer applies extra payments to the principal, there are some savvy ways you can set up your own biweekly mortgage plan without getting the greenlight from your lender.

“While it is true that the benefit of a biweekly mortgage plan will allow for the accumulation of less interest on the loan due to the extra payment, it is simply unnecessary to involve the lender in changing the loan terms so that a borrower must make a payment every two weeks instead of the normal payment due once a month,” explains David Reischer, attorney and CEO of LegalAdvice.com. “If a borrower wants to make an extra payment to accrue the benefit of a biweekly mortgage plan, then they can simply send a payment every two weeks instead of the payment due every 30 days.”

Heintz adds, “However, be sure to make it absolutely clear that this entire amount goes toward your principal balance. Otherwise, your lender might return the extra amount or forward it to your next payment, which negates the goal of biweekly payments.”

You can also divide your monthly payment by 12 and park that amount in a savings account each month. Then, send the accumulated amount to the lender as an extra payment at the end of the year. This is the same amount of extra payments you would have made in a year under a biweekly plan.

“Borrowers can always send in payments ahead of time on their own,” Brunker says. “However, they should coordinate with their servicer and check their monthly statements to make sure these payments are applied correctly, with the extra each month going to the principal.”

Whichever route you take, make sure your lender confirms any extra payments are being applied to the principal in a timely manner.

“If I entered a biweekly payment plan, then I would insist that the payment posts when it is received,” Reischer says. “If it’s not posting by the 15th of the month, assuming it is sent and received by then, I would make a formal complaint.”

Also keep in mind your monthly payment includes property taxes and insurance, so make sure to ask your lender if these payments would inflate your escrow cushion.

Bottom line

If done right, a biweekly mortgage payment plan leads to less interest paid over the life of the loan, saving you money and paying your loan off sooner. However, you must confirm that the extra payments are applied to the principal, and make sure you’re not subject to prepayment penalties. Also, watch out for any fees or third-party offers.

Remember too that in some cases, paying off your mortgage at a faster pace means you’re taking money away from other financial obligations. Before you commit to a biweekly payment plan, take a thorough look at your budget and make sure it is a feasible option for you.

Featured image by fstop123 of Getty Images.

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