Should you make biweekly mortgage payments?
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Most homeowners make their mortgage payments once a month. However, unless you have a prepayment penalty — and that’s unlikely — you can chip away at your outstanding balance on a more frequent basis. With a biweekly mortgage payment plan, you can make half your normal monthly payment every two weeks and pay down your mortgage faster.
How do biweekly mortgage payments work?
A typical mortgage payment is due on the first of the month, and it includes repayment of principal and interest, plus additional money if you’re contributing property taxes and homeowners insurance to an escrow account, as well as mortgage insurance and HOA fees, if applicable.
As you begin paying back your mortgage, the majority of each of your payments actually goes to interest — so your lender is making a lot of money, while you’re barely making a dent in the principal.
Let’s say you buy a $350,000 home tomorrow with a 30-year mortgage and a 10 percent down payment. Your principal is $315,000, and your interest rate is 7 percent. Your first mortgage payment breakdown would look like this:
A biweekly mortgage payment plan involves making half of that mortgage payment, or $1,047.50, every two weeks, for a total of 26 payments each year. At that rate, by the end of the year, you’d have paid $27,235 — $2,095 more than what you would have paid if you had made payments once a month. That extra payment, though, goes entirely toward your principal, adding up to a huge chunk of savings and a much faster payoff:
|Interest total||Payoff time|
|Monthly payments||$439,453||30 years|
|Biweekly payments||$327,470||23 years|
Pros and cons of biweekly mortgage payments
- Long-term savings: The biggest upside to biweekly mortgage payments — which is equivalent to making one extra payment a year — is the ability to save big on interest. For example, on that $315,000 biweekly mortgage, you’d save more than $31,000 in interest in the first 10 years versus making standard monthly payments.
- Faster path to equity: Whether you’re planning to stay in the home forever or sell it before your loan term is up, it’s never a bad thing to accumulate more equity. You’ll either pay off the loan and live mortgage-debt free, or be able to take more of the profit from a sale. If you’re still in the house, that equity also gives you a low-cost borrowing option you can tap in the future.
- Extra financial discipline: Contributing more money to your debt payments can help you establish smart money behaviors instead of spending your extra cash.
- Potential impact on other savings goals: Before you commit to making biweekly mortgage payments, consider whether doing so would benefit your overall financial plan. A biweekly strategy means putting more money toward your mortgage every year, which could pull from other financial obligations like saving for retirement. Additionally, if you’re trying to pay off high-interest debt, the 16 percent APR attached to your credit card, for example, should be a bigger priority than the single-digit APR attached to your mortgage. As you assess your budget, see if the savings outweigh any losses elsewhere.
- Possible prepayment penalty: Although not common, some mortgages come with a prepayment penalty that lenders charge if a borrower pays off the loan sooner than the repayment schedule dictates. Lenders can impose prepayment penalties in several different ways, such as charging 2 percent to 4 percent of the balance or a flat fee, like $3,000. Carefully read your loan documents or contact your servicer to see if you’d be subject to this fee. (Keep a record of who you spoke to in case there’s an issue later on.)
- May require some extra setup: Lenders want to earn their share of interest, so arranging biweekly payments might not be that simple. Before making the extra payments, contact your servicer to coordinate your payment plan and verify that your additional amount will go toward the principal. Again, keep track of who you spoke with and get confirmation of your conversation in writing.
How to set up a biweekly mortgage payment plan
Get in touch with the company that services your loan (this might or might not be your lender — here’s how to check). If your lender allows 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, for instance, you can send $1,000 biweekly.
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 your lender as an extra payment that goes solely toward the principal at the end of the year.
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.
- Extra payments are applied to the principal.
- 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.
Lastly, keep in mind your monthly payment includes property taxes and homeowners insurance, so make sure to ask your lender if these payments would inflate your escrow cushion.
Are biweekly mortgage payments right for me?
- What does my savings account look like? Getting on a faster path to being debt-free feels good, but it shouldn’t be at the expense of your emergency fund. Biweekly payments are generally only worth it if you have the cash to spare and won’t be stretching yourself too thin.
- What other debts am I paying? If you’re still paying off your car, student loans or credit cards, consider the interest rate attached to them. You might be better off getting any other debts down to zero before shifting your attention to your mortgage.
- What’s my interest rate? The higher your mortgage rate is, the more you’ll be able to save with biweekly payments. If you managed to lock in a record-low mortgage rate — somewhere in the neighborhood of 3 percent — you’ve already done a good job of lowering your interest charges.
- Do I receive quarterly or yearly commissions? Remember: The biweekly payment schedule adds up to one additional monthly payment amount each year. If switching to more frequent payments complicates your life or your arrangement with your lender, you can also opt for sending one large additional sum to pay down the principal. If you work in sales and receive regular commission payouts, consider using those bigger paychecks for extra payments.
- Would I be better off investing the extra cash? Save money by eliminating debt, or earn money by finding good investment opportunities? That’s a big question that doesn’t necessarily have an easy answer. While the market is facing some serious headwinds right now, those with a decent risk tolerance — and a long time horizon — might opt for putting money in the stock market in the hopes of generating a bigger return. On the other hand, eliminating debt is one of the best “investments” you can make, because it frees up your cash and lowers the cost of any future debt you take on.
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 make sure you’re not subject to prepayment penalties.
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 biweekly payments, take a thorough look at your budget and goals.