Fun fact: Mortgage roughly translates to “death pledge” in old French or Latin. That’s because it’s a very long-term commitment — lasting at least 15 and more commonly 30 years. If you follow the payment schedule, you’ll be making payments on the loan for decades.
Many people want to get out from under their mortgage in less than 15 or 30 years. One popular strategy to make paying your mortgage off early a bit easier is to make biweekly payments rather than monthly payments.
Is this strategy worth it for you? Let’s break down the pros and cons.
Monthly vs. Biweekly Mortgage Payments
While most mortgages only require monthly payments, some borrowers choose to make biweekly mortgage payments instead. Biweekly payments can help you repay the loan more quickly while still giving you a predictable monthly payment.
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How Monthly Mortgage Payments Work
A monthly mortgage payment is the traditional mortgage payment. Each month, your lender sends you a bill. That bill has a due date, and you make your payment on or before that due date.
Each payment you make covers all of the interest that accrued on the loan, as well as a portion of the principal. Over the course of a thirty-year mortgage, you’ll make 360 payments, so the lender calculates the size of the payment required to pay the loan off over that period.
Imagine you get a loan for $250,000 at a rate of 5% interest. Your monthly payment will be $1,342 before taxes and other fees.
During the early stages of your loan, a large portion of that $1,342 will go toward covering interest and only a little will reduce the principal. Your first payment, for example, will see $1,041.67 go toward interest and just $300.39 toward principal.
Halfway through the loan, your 180th payment will see a more even split, with $709.76 going toward interest and $632.30 toward principal. With your final payment, just $5.57 goes toward interest and the remainder pays off the last principal on the loan.
How Biweekly Mortgage Payments Work
With biweekly mortgage payments, you make a payment toward your loan every other week rather than once every month. This helps you pay off your mortgage more quickly.
The reason that biweekly payments increase the speed at which you pay off a mortgage is that they result in you making the equivalent of an extra monthly payment each year.
There are fifty-two weeks in a year, so making a payment every other week means making twenty-six payments. If each payment is half the size of the required monthly payment, you’ll pay more than the minimum required each year.
This strategy is popular because it is an easy, automatic way to make additional payments on your loan.
To use the example above, if you borrow $250,000 at 5% interest, your required monthly payment is $1,342. To meet your minimum payment requirement, you can choose to pay $671 every other week.
This results in you paying a total of $17,446 per year instead of the required $16,104. This lets you pay down principal more quickly and reduce the interest that accrues, helping you pay your loan off a few years ahead of schedule.
Pros & Cons of Paying Your Mortgage Biweekly
Making biweekly mortgage payments has obvious benefits and drawbacks. You get to pay off the loan early, but you have to spend more each year on loan payments. However, there are other pros and cons to consider.
|Pros of Biweekly Payments||Cons of Biweekly Payments|
|Pays off your loan earlier||Pays more each month|
|Saves money via less interest||Leaves less money to invest|
|Builds equity faster||May incur lender fees or roadblocks|
|Simplifies your budget||May incur prepayment penalties|
Pros of Paying Your Mortgage Biweekly
Beyond helping you pay your loan off ahead of schedule, making biweekly payments on a mortgage can save you money without massive budget impacts.
- Pay Off Your Loan Early. Using biweekly mortgage payments results in paying more toward your loan each year. This can help you get out from under your mortgage in a few years less than the typical thirty-year schedule.
- Save Money.Your additional mortgage payments will reduce the principal of your loan. Because the amount of interest that accrues on your loan depends on the principal balance, having a lower balance means less interest accrues, letting you pay less toward the loan overall.
- Build Equity Faster. Because biweekly payments help you reduce your loan’s principal, they also help you build equity. That can be valuable if you want to get a home equity loan or HELOC or stop paying for mortgage insurance.
- Simplify Your Budget. If you have a job that pays you biweekly, setting up biweekly mortgage payments can make budgeting simple. Just designate a portion of each paycheck to go to your lender.
Cons of Paying Your Mortgage Biweekly
Making biweekly mortgage payments means spending more money on loan payments each year. However, it comes with other costs that are important to consider.
- Spend More on Loan Payments. The obvious drawback of biweekly loan payments is that you’re ultimately paying more than you need to each month. If you have a tight budget, you might be better off using that money for other purposes.
- Opportunity Cost. Putting extra money into your mortgage locks those funds into an illiquid asset. You may be able to earn more than you saved by investing your money in mutual funds, stocks, or bonds, especially if your mortgage has a low interest rate.
- Lender Fees or Lack of Support. Your lender might not be equipped to accept biweekly payments or may charge a fee if you want to set up a biweekly payment plan.
- Early Repayment Penalties. Some mortgages carry prepayment penalties which you have to pay if you pay your loan off ahead of schedule. Check the fine print of your loan to see if these fees apply to your loan.
Are Monthly or Biweekly Mortgage Payments Better for You?
Whether monthly or biweekly mortgage payments are better for you depends on many factors.
One of the first things you should look at is the interest rate of your mortgage. The higher the interest rate on a loan, the greater the benefit of making an extra payment each month. If you have a high credit score and a correspondingly low mortgage rate, you’ll save less with biweekly payments.
If you’re dealing with private mortgage insurance, you can often stop making payments once you reach a certain amount of equity in your home. Biweekly payments help you build equity more quickly, which can get you out of PMI faster, making it more appealing if you want to build equity quickly.
Another consideration is the flexibility of your budget. If you’re struggling to make ends meet, you may have trouble affording the equivalent of an extra monthly payment each year.
Finally, risk tolerance is a critical consideration. It’s hard to measure the peace of mind that comes with owning your home outright with no home mortgage. If you have a low risk tolerance and like the idea of paying off your loan rather than investing in the stock market, biweekly payments might be better for you.
How to Set Up a Biweekly Mortgage Payment Plan
Depending on your mortgage lender or mortgage servicer, setting up a biweekly payment plan can be simple or take a bit of effort.
Some lenders support biweekly payments already. All you have to do is contact your lender and let them know you’d like to set up a biweekly payment plan. The lender will take care of the rest, helping you set up automatic payments and applying the payments to your loan as they arrive.
If your lender doesn’t support biweekly payments toward your mortgage loan, you’ll need to take things into your own hands.
One option is to use a bill pay service, such as the one provided by your bank, to send half payments every other week rather than relying on your lender’s automatic payment system. Just double check to make sure your lender properly accepts and applies those payments toward your loan.
Another is to simply increase your monthly payment to create the same effect as biweekly payments. It’s not quite the same, but will have a very similar impact. To do this, divide your monthly payment by 12, then add the resulting amount to each monthly payment. So, if your mortgage payment is $1,200 a month, send $1,300 a month instead.
This means you won’t be paying your loan biweekly, but over the course of the year you’ll pay the same amount as you have paid through biweekly payments. Like biweekly payments, this will save you money over the life of the loan and help you pay off the mortgage more quickly.
Making biweekly mortgage payments is one strategy to save money on your home loan. This strategy isn’t right for everyone, but fortunately it isn’t the only way to save money on a mortgage.
For example, if market rates fall or your credit improves, you may be able to refinance your loan to a lower rate. That reduces the interest that accrues and helps you save money overall.
Likewise, if you receive a windfall — like an inheritance or signing bonus at a new job — you can make a large payment toward your mortgage’s principal, then ask the lender to recast the loan. If they agree, they’ll recalculate your principal and interest payments based on the new principal and remaining term, likely lowering your monthly payment.
Bottom line: If a biweekly payment cycle isn’t for you, you have options.