Does Paying Your Mortgage Biweekly Save Money?

A biweekly mortgage payment involves making half of your regular monthly mortgage payment every two weeks. This payment structure can be a way to manage your home loan. This article will explain how this payment method works and whether it can ultimately save you money over the life of your mortgage.

Understanding Biweekly Payments

A standard mortgage payment schedule typically involves 12 full payments each year, made once a month. With a biweekly payment plan, you instead make 26 half-payments over the course of the year. This total of 26 half-payments equals 13 full monthly payments within a 12-month period. For example, if your monthly payment is $2,000, you would pay $1,000 every two weeks, totaling $26,000 per year, compared to $24,000 with monthly payments.

How Biweekly Payments Reduce Interest

The mechanism by which biweekly payments save money centers on accelerating the reduction of your loan’s principal balance. By making an extra full payment each year, more money is applied directly to the principal. This quicker principal reduction means that interest, which is calculated on the outstanding balance, has less time to accrue on a larger amount.

A lower principal balance leads to less interest being charged over the loan’s duration, effectively shortening the repayment term. For instance, a 30-year mortgage could be paid off several years sooner, potentially saving tens of thousands of dollars in total interest. A $400,000 mortgage at 6.5% interest, with monthly payments of $2,528.27, could see a reduction of almost six years off the loan term and savings of nearly $120,000 in interest by switching to biweekly payments.

Setting Up Biweekly Payments

There are several ways to implement a biweekly payment strategy for your mortgage. The most direct method is to inquire if your lender offers an official biweekly payment program. If they do, you would typically set up automatic deductions for half of your monthly payment every two weeks directly with them. It is important to confirm that your lender will apply these extra payments directly to the loan principal and that no prepayment penalties or fees are involved.

Some homeowners choose to use third-party services that facilitate biweekly payments. These services collect half your payment every two weeks and then forward a full monthly payment to your lender when due. However, these services may charge setup fees and ongoing transaction fees, which can diminish your savings.

A manual approach allows you to achieve the same financial benefit without involving third parties or needing a specific lender program. You can consistently make one extra principal payment each year, or divide that extra payment into 12 smaller amounts and add it to each monthly payment. For example, if your monthly payment is $1,500, you could add an extra $125 each month (1/12th of a payment) to reach the equivalent of a 13th payment annually. When making any extra payments, it is important to clearly designate that the additional funds are to be applied to the loan’s principal balance.

Important Considerations Before Starting

Before committing to biweekly mortgage payments, review your loan documents for any prepayment penalties. While less common on many mortgages, some loan agreements may include clauses that charge a fee if you pay off a significant portion of your loan early.

Maintaining sufficient financial flexibility is another important consideration. Before allocating extra funds to your mortgage, ensuring you have an adequate emergency fund. This fund provides a safety net for unexpected expenses like job loss or medical emergencies, preventing you from needing to borrow at higher interest rates.

For some, investing extra funds might yield higher returns than the interest saved on a mortgage, especially if your mortgage interest rate is relatively low. Ultimately, verifying with your lender that any extra payments are correctly applied to your principal balance is necessary to ensure your efforts translate into interest savings.