You’ve probably already heard the claims. That a “biweekly mortgage” can save you thousands of dollars. And that biweekly mortgage payments can shave years off the life of your loan and help you accrue equity in your home super fast.
Well, it’s true! Pardon the exclamation point. You probably thought I was going to say it was a bunch of baloney like most gimmicks you hear about. But no, it’s legit, and it’s pretty straightforward too. It’s just basic math, which we’ll get into below.
It’s also fairly easy to set up a biweekly mortgage plan, which requires a payment every two weeks as opposed to every month.
In short, biweekly mortgage payments are a sort of accelerated mortgage payoff system that allow you to make an extra monthly payment each year and in turn save money on interest and pay your mortgage faster. As noted, the way it works is rather simple.
How Biweekly Mortgage Payments Work
Monthly mortgage payment: $2,000
Total paid annually: $24,000
Biweekly payment (made every 2 weeks): $1,000
Total paid annually: $26,000
Result: One extra payment each year!
Instead of making a single monthly mortgage payment each month, or 12 payments per year, you make a half mortgage payment every two weeks.
And because there are 52 weeks in a year, that equates to 26 half payments annually, or 13 total monthly mortgage payments.
Let’s pretend you’ve got a 30-year fixed mortgage; if your monthly payment were $2,000 per month, under one of these payment plans you’d pay $1,000 every two weeks. Instead of paying a total of $24,000 throughout the year, you’d wind up paying $26,000.
That extra $2,000 equates to one payment – and because it is allocated throughout the year, it pays down your mortgage balance earlier than scheduled, which saves you interest and builds home equity sooner.
Put simply, you’ll pay the bank less interest and own your home sooner, if that’s your goal.
This can be especially useful if mortgage rates are high, but less so if you’ve got a rock-bottom rate that isn’t costing you much money.
Of course, it’s not that simple. Nothing ever is. You can’t expect the bank or mortgage lender to allow you to mail in a half payment twice a month, that simply won’t fly.
Instead, you may need to enroll in a biweekly mortgage payment program of some kind.
Your bank or loan servicer (whoever handles your mortgage) will likely ask you to set-up a biweekly payment system with an intermediary, which acts as a liaison between you and your lender.
But these biweekly payment companies can get expensive, especially when they charge a set-up fee of anywhere from $200-$500 and then an additional fee for each transaction. And at that point, it would start to defeat the intended purpose of saving money!
Fortunately, some banks and credit unions may offer the service in-house for free so you don’t have to worry about the fees. Always inquire with your loan servicer first before seeking out an outside company. No sense is paying for a service you can get free of charge.
[Check out my early mortgage payoff calculator.]
So what are the benefits of a biweekly mortgage anyway?
– you can increase the amount of equity in your home at a faster rate
– you can save money by paying less interest on your mortgage
– you can reduce the term of your mortgage and own your home sooner
– your mortgage payments are automated and made simple
– more frequent payments decrease the outstanding principal loan balance faster
And the drawbacks…
– you put more of your hard-earned money toward the mortgage each month (and year)
– that money is now locked up in your property
– not everyone actually wants to pay down their mortgage faster (or at all)
– there may be fees associated with a biweekly mortgage program
– you might be better off making a lump sum payment early in the year instead
– you might be able to put your money to use elsewhere if you have a low mortgage rate
So you’ve thought about it and like the benefits a biweekly mortgage affords, but it seems somewhat defeatist to pay someone to help you save money on your mortgage right? Right.
Fortunately, there’s an alternative to do it yourself with a “no cost biweekly mortgage” plan, thereby avoiding those payment processing companies completely.
No Cost Biweekly Mortgage Payments
Forget that fancy name. I just made it up. Here’s how it works.
Instead of having a biweekly mortgage company handle your monthly payment for a fee, or having to make 26 payments a year, simply take your normal monthly mortgage payment, divide it by twelve, and add that amount to your mortgage payment each month. And then send in your increased monthly payment to the bank or lender. That’s it, you’re done.
They should accept the higher payment and put any additional funds toward the outstanding principal balance automatically. And that will allow you to pay off your mortgage ahead of schedule. The operative word there is should.
Let’s look at an example of a do-it-yourself biweekly mortgage to illustrate:
Loan amount: $200,000
Mortgage rate: 4.25% (30-year fixed)
Regular monthly mortgage payment: $983.88
1/12 of that amount: $81.99
New combined payment (paid just once a month): $1,065.87
Total savings: $30,205 in interest
Mortgage term: 309 months (loan paid off more than 4 years early)
Be sure that you note the extra amount is to go toward the principal balance! If you don’t make this clear, some lenders will return the surplus money, apply it to your next payment, or perhaps apply it your escrow account. It’s important that this is 100% clear so the money goes to the right place.
This free biweekly mortgage method actually works in your favor for several reasons. First, you don’t pay any extra junk fees to have someone do it for you.
And second, because you make an extra payment to principal each month, your loan balance is reduced each month and home equity is accrued faster, reducing the total amount of interest due throughout the life of the loan. So you pay less interest in a shorter amount of time. Amazing.
Additionally, it’s easy to execute. You’re still making 12 payments per year, so it doesn’t require any extra work like actual biweekly payments.
Biweekly Payments Require Discipline
The only drawback to doing it yourself is the old self-discipline issue. Can you trust yourself to make the higher payment each month? Will you remember to do it?
Luckily, these days you can set up automated payments from your checking account for free, so it shouldn’t be too much of a problem either way. And you have the benefit of backing out at anytime if your financial situation changes for any reason.
You don’t have to nail it down to an exact science either. You can always pay an extra $100, $200, or $300 a month if you’d like. Find a number that works for you and stick to it.
Or make extra payments throughout the year based on your income fluctuations. If you’re determined to pay your mortgage off, every little bit helps. You can even round up your payments.
You don’t need to enroll in a “mortgage acceleration program” or hire a “certified mortgage acceleration specialist” to help you figure out how to make your loan amortize more quickly.
It’s really quite simple. Don’t fall for gags that require you to pay an extraneous set-up fee or a transaction fee every time you make a payment. Your goal is to pay less, not more!
And don’t confuse biweekly mortgages with “bimonthly mortgages.” A bimonthly mortgage, or semi-monthly mortgage involves no extra payments, just two half payments a month that equate to the typical 12 payments a year. In effect, the practice does very little if anything to save money, and isn’t offered by many banks and lenders.
Avoid Partial Mortgage Payments!
One final note: Be careful not to make a “partial mortgage payment” to your mortgage lender as it could result in some unintended consequences.
At worst, the mortgage company may send your payment back if it’s not made in full. This could result in a late fee and a possible credit ding if you don’t make the full payment in time.
In other words, making two half mortgage payments a month probably won’t go well. But you can always call your lender or loan servicer and ask if you can pay your mortgage every two weeks just to be sure.
For the record, mortgages are generally calculated monthly (not daily), so making a half payment early won’t result in any additional savings. And 24 half payments is just 12 full payments, so you won’t do yourself any favors.
Assuming they do hang onto your partial payment, they may place it in a suspense account, where it will remain until enough money comes along to make at least one full payment. So if you make another partial or full payment after sending the initial partial payment, they’ll only apply the funds if the total is enough to make one full payment.
This is why companies offer biweekly programs to avoid any misunderstanding with your lender if you send in two payments that are supposed to cover your full payment and a surplus toward principal.
When sending a payment that doesn’t correspond with your actual payment due, make sure it’s utterly clear that any additional amount will go toward principal and not escrow (usually you’re given a choice). That way there’s no confusion about why you’re paying more than the amount due.
If you round up a payment, indicate where you want the excess to go. If the lender/servicer’s website doesn’t make this abundantly clear, call before you pay to ensure your payments will be applied properly.
Lastly, check to see if your monthly housing payment is impounded, where property taxes and homeowners insurance are included. If so, you’ll want to find just your principal and interest payment for the purposes of calculating a biweekly payment. Any old loan calculator will accomplish that.
Read more: How to pay off the mortgage early.