Your mortgage payment schedule may seem like a minor detail, but how often you make payments can have a large impact on the total cost of your loan. Switching to a biweekly schedule is a convenient way to pay off your home loan faster and save money.
What Are Biweekly Mortgage Payments?
Biweekly mortgage payments are payments that a mortgage servicer collects every two weeks. Each payment is half the size of your monthly payment.
With a biweekly schedule, you end up paying down more of your mortgage balance per year than with a traditional monthly schedule.
A biweekly schedule isn’t the typical choice for most borrowers. “I know, at least from our internal data, that about 10% of consumers actually have biweekly payments set up in an automated fashion,” says Bryan Meizinger, chief credit officer at FAIRWINDS Credit Union.
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How Biweekly Mortgage Payments Work
A biweekly payment schedule involves making half of your usual monthly payment 26 times per year. That’s equal to making one extra full monthly payment each year.
If you have a $2,000 mortgage payment, for instance, you could pay $2,000 once a month for a total of $24,000 over the course of a year. But with biweekly payments, you’d instead pay $1,000 every two weeks, or $26,000 in total each year.
If your servicer immediately applies your payments to reduce the amount you owe, paying biweekly can dramatically lower the total interest you’ll pay on your home loan.
Anthony Grosso, senior loan officer at Green River Mortgage, gives an example. “Say we do a $400,000 loan at a 7% rate,” he says.
If your monthly payment is $2,661, you’d pay $558,036 interest over the life of the loan. But paying $1,331 biweekly cuts the interest expense to $420,180, saving you $137,856. And you can be mortgage-free in just under 24 years.
“It’s significant savings over time when you do the biweekly,” Grosso says.
Pros and Cons
To determine whether you’re better off with a biweekly payment schedule, consider the pros and cons.
Pros
— Paying biweekly creates significant interest savings. The total interest paid can decrease by tens of thousands of dollars over the life of the loan.
— You build equity in your home faster.
— You could pay off your mortgage several years early, freeing up room in your budget for other financial goals. “There’s really nothing better than having no mortgage payments at all,” Meizinger says.
— For many people, biweekly payments align with the timing of their paycheck, making budgeting easy.
Cons
— A biweekly payment schedule directs a larger share of your annual income toward paying down your home loan. If you’re living paycheck to paycheck, it might not be doable for you.
— The benefits of a biweekly schedule might not be felt for decades. “Historically, no one’s really holding the mortgage that long,” Grosso says. If you’re going to move or refinance after a few years, biweekly payments might not make much difference.
— When you apply additional income toward your mortgage principal, that money isn’t available for other uses, like investing or paying down higher-interest debt. “Depending on what your interest rate is, could there be other investments that are better for you to be putting your money into that are growing?” Grosso says.
How to Set Up Biweekly Mortgage Payments
If your mortgage servicer offers a biweekly payment schedule, you can set up payments by phone or online. You’ll need to specify the bank account you want payments withdrawn from, and you might also be asked for a copy of your paycheck. Typically, the servicer will implement the change within about 30 days.
You’ll want to confirm in writing that the servicer applies your payments to the loan on a biweekly basis and doesn’t simply hold them until the next monthly payment date.
“If the mortgage lender does offer a biweekly program, ask about the fine print. Do they transfer the biweekly payment from your checking account and apply it to the loan balance that very day?” Meizinger says.
If your servicer doesn’t apply payments on a biweekly basis, you can still get some benefit from paying every two weeks because you are making an extra monthly payment each year. But you won’t enjoy the interest savings that come with paying down your principal more quickly.
Manually making a payment every two weeks is an option if your servicer doesn’t offer a biweekly schedule, or you can schedule the payment with your bank or through an app. Again, you should check what your servicer will do with that payment.
Alternatives to Biweekly Mortgage Payments
Making payments biweekly isn’t the only way to chip away at your principal and pay off your mortgage faster. The following strategies can also help.
First, you could make larger payments, whatever your schedule is. “Round your payment. Pay an extra $100, pay an extra $200, whatever you can afford,” Meizinger says. Ask your servicer to apply the additional amount to your principal.
Sometimes banks offer a service that will round up your debit card purchases and deposit the change in a savings account or apply it toward a loan.
“It’s another great way to take all of that extra money, whether you’re just talking a couple of dollars or a couple hundred dollars, whatever it might be. It’s just critical to sweep that over to your loan and pay principal payments whenever you possibly can,” Meizinger says.
And if you get a tax refund or any other unexpected income, you could use that money to make an additional payment toward your mortgage principal.
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Who Should Consider Biweekly Mortgage Payments?
According to Meizinger, borrowers are ready to consider a biweekly payment schedule if they’re paying their credit cards in full each month and don’t have outstanding with higher interest rates than their mortgage. You’ll save more by paying off higher-interest debt before accelerating your mortgage payoff.
“Once those debts are eliminated, then asking for biweekly mortgage payments is absolutely your next step to eliminate your debt,” Meizinger says.
And because the interest savings with a biweekly schedule are most pronounced when you stick with the loan long-term, Grosso recommends that borrowers consider biweekly payments if they plan to stay in their home for several years. Often, people who have moved on from a starter home and bought a house for the second time are in a good position to benefit from biweekly payments, he says.
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Biweekly Mortgage Payments: How Much Can You Save? originally appeared on usnews.com
