There are certain expenses we all anticipate each month. If you own a home, one of these regular payments is likely for your mortgage.
By default, mortgage loans are repaid monthly in 12 equal payments throughout the year for the duration of your loan term. However, by making a small change in how and when you make those loan payments, you can reduce the total interest paid and satisfy your mortgage debt faster than planned. It’s all thanks to biweekly payments.
Let’s take a look at what biweekly mortgage payments are, the impact they can have on your finances and why you might want to consider setting them up to save money and time on your mortgage loan.
Many homeowners wonder if they can split their monthly mortgage payment into two biweekly payments instead. This payment strategy offers some advantages, but it also has some drawbacks to consider. In this comprehensive guide, we’ll explain how biweekly mortgage payments work, the pros and cons, and how to decide if it’s the right choice for your situation.
What Are Biweekly Mortgage Payments?
With a biweekly mortgage, you pay half your normal monthly mortgage payment every two weeks. This results in 26 half-payments over the course of a year, which is the equivalent of 13 full monthly payments.
For example if your monthly mortgage payment is $2000, you would pay $1,000 every two weeks, or 26 payments of $1,000. That adds up to $26,000 for the year, which is $2,000 more than just making 12 monthly payments.
The extra money goes directly toward reducing your mortgage principal. By making an extra month’s payment each year you end up paying down your mortgage faster and reducing the total interest you pay over the life of the loan.
Pros of Biweekly Mortgage Payments
There are several advantages to splitting your mortgage into biweekly payments:
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Pay off your mortgage faster – With biweekly payments, you can shave years off your mortgage term and build equity quicker. Each extra payment goes straight to reducing your principal balance.
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Pay less interest – Since more money goes toward principal each year, you pay off your loan faster and reduce the total interest paid. This results in big interest savings, especially in the early years of your mortgage.
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Automatic savings – Setting up biweekly payments takes the effort out of manually saving to make an extra payment each year. The routine small payments add up over time.
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Better cash flow – Matching pay periods with payment schedules can make budgeting easier. Your income and largest expense are synced up.
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Motivation to pay extra – The set biweekly schedule encourages you to consistently pay more than the minimum needed. It builds momentum to pay down debt aggressively.
Cons of Biweekly Mortgage Payments
While biweekly payments offer clear benefits, there are also some potential downsides to consider:
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Higher annual costs – You have to pay for 13 months of mortgage payments each year rather than 12. This raises your annual housing costs.
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Prepayment penalties – Some older mortgages charge fees for early payoff. Make sure yours doesn’t before switching to biweekly payments.
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Setup obstacles – You’ll need to coordinate with your lender to properly apply the extra biweekly payments to principal. Some make this difficult.
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Loss of flexibility – The rigid payment schedule doesn’t allow you to easily adjust how much extra you pay towards principal month-to-month.
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Lower liquidity – More money going to your mortgage means less available for other goals or emergencies. Build your savings first before committing to biweekly payments.
How to Set Up Biweekly Mortgage Payments
If you decide biweekly payments are right for your situation, here are a few tips for setting it up correctly:
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Contact your lender – Make sure they allow biweekly payments and that the extra amount will go toward your principal balance. Get confirmation in writing.
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Automate payments – Set up automatic bank drafts every two weeks to ensure on-time payments. Manually sending checks leaves room for missed payments.
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Divide tax and insurance – Make sure your escrow payment is divided evenly between the 26 biweekly payments.
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Label payments – Clearly indicate on your checks or bank drafts that the extra amount should go toward principal only.
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Avoid third parties – Don’t use a separate company to manage your payments. They often just charge fees and provide no real benefit.
Is Biweekly Right for You?
Before committing to biweekly mortgage payments, make sure it aligns with your overall financial situation and goals. Ask yourself these questions:
- Will it prevent you from saving adequately for other goals like retirement or college?
- Do you have enough emergency savings to handle unexpected expenses?
- Are there debts with higher interest rates you should focus on first?
- Do you plan to stay in the home long enough to benefit from faster payoff?
- Will you need flexible access to your home’s equity in the next few years?
If you can swing the extra payments while still meeting other financial objectives, biweekly mortgage payments can be a smart move. Just be sure to understand the tradeoffs and get your lender on board to make it work seamlessly.
Frequently Asked Questions
Can I make two monthly mortgage payments?
Yes, you can elect to pay your mortgage twice per month instead of biweekly. For example, you could pay half on the 1st and half on the 15th each month. This allows 24 half-payments per year, resulting in accelerated payoff.
What if I can’t afford biweekly payments some months?
The benefit of biweekly payments is the forced savings discipline. But if money is tight in a given month, you can just pay your normal monthly amount. Missing a biweekly payment here and there won’t significantly reduce the long-term benefits.
What happens if I sell my home before paying off my mortgage?
You’ll still benefit from biweekly payments through the additional equity accumulated. More of the sale proceeds will go towards your equity rather than paying off mortgage principal.
Can I deduct biweekly mortgage interest on my taxes?
Yes, the interest portion of biweekly payments is still deductible on your taxes the same as normal monthly mortgage interest. You’ll receive a 1098 tax form from your lender documenting deductible interest paid.
How much faster will I pay off my mortgage?
On a 30-year fixed-rate mortgage, biweekly payments can cut your payoff time by about 5-7 years and 15-20% of total interest costs. The savings are greatest in the early years of your mortgage.
The Bottom Line
Biweekly mortgage payments can be an effective strategy to pay off your home loan faster and reduce total interest costs. But make sure you budget carefully and have a sufficient emergency fund before committing. The forced savings discipline of biweekly payments provides great motivation to pay down debt aggressively. Just be sure your lender can properly handle the extra payments before getting started.
What Are Biweekly Mortgage Payments?
Mortgage loans are typically set up the same way. Once you’ve chosen your loan term (such as 15 or 30 years), your lender will establish a set monthly payment. You will make this payment once a month every month, until the loan is satisfied, for 12 equal payments a year.
With a biweekly payment plan, however, you’ll make a partial payment every 2 weeks instead. Simply divide your standard mortgage loan in half, and that’s your biweekly payment.
Simply put, if your monthly mortgage payment is $1,500, your biweekly mortgage payment will be $750.
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Interest on mortgage loans is usually calculated on a monthly basis. This means that the lower your loan’s principal balance, the lower the interest charged will be.
By paying biweekly, you’ll reduce your principal balance slightly prior to that monthly interest being calculated. These savings will add up month after month, not only reducing your total mortgage interest, but also paying off your loan sooner. Let’s look at the math.