How Much Does Paying Mortgage Biweekly Save?

Homeownership involves a long-term financial commitment through a mortgage. Many homeowners seek strategies to manage this debt more efficiently, aiming to reduce the total cost and shorten the repayment period. Understanding various payment approaches can help optimize mortgage obligations and achieve financial goals sooner.

The Mechanism of Bi-Weekly Mortgage Payments

Bi-weekly mortgage payments accelerate loan repayment. Instead of making one full monthly payment, borrowers make half of their typical monthly payment every two weeks. This schedule means that over a calendar year, there are 26 bi-weekly periods, resulting in 26 half-payments. These 26 half-payments collectively amount to 13 full monthly payments within a year, rather than the standard 12.

The additional payment generated each year is applied directly to the loan’s principal balance. Since interest is calculated on the remaining principal, reducing this balance more frequently causes less interest to accrue. This continuous reduction allows a greater portion of subsequent payments to go towards the principal, leading to a quicker payoff of the entire loan.

Calculating Your Interest and Time Savings

Bi-weekly mortgage payments offer interest savings and a reduced loan term. Consider a hypothetical 30-year fixed-rate mortgage for $350,000 at a 7% interest rate. With standard monthly payments, the total interest paid would amount to approximately $439,453 over the loan’s duration.

By switching to a bi-weekly payment schedule, the total interest paid could drop to around $327,470. This represents an interest saving of approximately $111,983 over the life of the loan. This accelerated payment method can also shorten the loan term from 30 years to about 23 years, effectively shaving off seven years.

The magnitude of these savings is influenced by several factors, including the initial loan amount, the interest rate, and the original loan term. Higher interest rates and larger loan balances generally result in greater potential interest savings. For example, a $200,000 loan at 4.125% could save over $24,000 in interest and shorten the term by more than four years.

Setting Up Bi-Weekly Payments

Borrowers interested in implementing bi-weekly mortgage payments have several avenues. The most direct approach is to contact the mortgage lender or loan servicer to inquire about their specific bi-weekly payment program. Many financial institutions offer this option. It is important to confirm that any extra payments will be applied directly to the loan’s principal and that there are no prepayment penalties.

Alternatively, some homeowners use third-party services that facilitate bi-weekly payments. These services collect half of the monthly payment every two weeks and then forward the full monthly payment to the lender on the due date. At the end of the year, these services consolidate the extra half-payments into a full additional payment, which is then sent to the lender to be applied to the principal. However, these third-party services often come with setup fees, potentially ranging from $250 to $400, and may also charge small transaction fees.

A self-managed approach is another option, where borrowers manually make additional principal payments throughout the year. This can involve dividing the monthly payment by 12 and adding that amount to each regular monthly payment, or making one extra full payment at the end of the year. This method avoids potential fees associated with lender programs or third-party services. Always verify with the lender that extra payments are applied to the principal.