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Updated on Wednesday, April 28, 2021
If you’re looking to tackle your mortgage balance faster without feeling the strain of extra payments, paying your mortgage biweekly (every other week) could help you do just that. Not only can this be a great way to sneak in additional loan payments, but there are also a number of other financial advantages it provides.
Let’s discuss what it means to make biweekly mortgage payments and how beneficial this repayment method can be.
- How does paying a mortgage biweekly work?
- 5 reasons to make biweekly mortgage payments
- Pros and cons of paying a mortgage biweekly
How does paying a mortgage biweekly work?
If you’re like most people, you make a scheduled mortgage payment every month. These 12 total payments per year are pretty easy for most people to plan and budget for, and this is the default payment schedule for most lenders.
But what if you made biweekly payments instead? In that case, either you or your lender would split your usual monthly payments in half, so you would submit a payment every two weeks. For example, if you normally make a $2,000 monthly mortgage payment, a biweekly schedule would have you making a $1,000 payment every other week.
THINGS YOU SHOULD KNOW
At first glance, making biweekly payments might seem the same as making full payments each month. However, there’s a nice little quirk in the calendar that lets you get ahead.
There aren’t a uniform number of days in each month, so paying a mortgage every two weeks means you’ll actually submit 26 “half payments” — or 13 “full payments” — per year rather than the normal 12 payments. That’s one extra full payment per year, and you won’t even feel it because you’ve slowly budgeted for it over a 12-month period. This extra payment might not seem like much, but over the course of the loan, it has huge effects.
Let’s look at an example using MagnifyMoney’s mortgage calculator. Say you just bought a home and have a $250,000 mortgage with a 30-year term. Your interest rate is 4.125%, and your monthly payment is $1,212. Here’s what will happen if you stick with 12 standard payments, versus opting for biweekly mortgage payments:
|Monthly payment schedule||Biweekly payment schedule|
|Original loan amount||$250,000||$250,000|
|Number of payments per year||12||26|
|Total amount paid per year||$14,539.44||$15,751.06|
|Years to payoff||30 years||25 years and 10 months|
|Total interest paid||$186,184.76||$156,371.20|
Every two weeks, you’ll make a $605.81 payment, versus making a $1,211.62 payment once a month. By making biweekly mortgage payments versus monthly payments, you’ll save $29,813.56 in the end, and you’ll pay off your loan approximately four years and two months early.
5 reasons to make biweekly mortgage payments
There are several benefits of paying a mortgage biweekly. While it may require a little extra work on your end, at least in the beginning, you may find it completely worthwhile.
Here are the top five reasons to consider paying your mortgage every two weeks, and what they can do for your finances.
1. You can pay off your mortgage faster
As shown in the example above, making biweekly payments can help you pay off your mortgage early — even years early, in some cases.
By paying your mortgage every two weeks, you’ll be chipping away at your principal balance faster than normal. We won’t lie; it’ll still seem like you’re paying off the mortgage at a glacial pace, but you’ll have a slightly sharper pick than your neighbor making standard monthly payments.
If you have that $250,000 mortgage mentioned above and you’re making biweekly mortgage payments, you can actually shave four years and two months off of your loan. Instead of being in debt for 30 years, you’ll only be in debt for 25 years and 10 months. Imagine what you could do with four mortgage-free years!
2. You’ll pay less in interest
Each mortgage payment you make is composed of an interest payment and a principal — or original loan amount — payment. When you first start paying down your mortgage, a larger percentage of the monthly payment will go toward interest, while very little goes toward your principal balance. Over the course of a 15- or 30-year loan, you’ll slowly begin paying more toward the principal than interest.
This process is called amortization, and anyone who’s ever had a loan literally had to pay their dues, especially during those first few years.
But, again, here’s where making biweekly mortgage payments can really help you. Since you’re making an extra full payment each year, you’ll pay down the principal even faster. This means each interest payment thereafter will be smaller than if you hadn’t made that extra payment.
In the end, this can save you a huge amount of money. For example, if you have a $350,000 mortgage with a 4.125% interest rate and a 30-year term, making biweekly mortgage payments can save you nearly $42,000 over the course of your loan.
3. You’ll build equity faster
One of the biggest benefits of making biweekly mortgage payments is that you build home equity faster.
Equity is the difference between your home’s value and what you still owe on your mortgage. It essentially represents how much of your home you actually own (versus what your lender technically still owns). For instance, if your home is worth $250,000 and you still owe $170,000 to your mortgage lender, you have $80,000 in equity.
When you make biweekly payments and manage to squeeze in that extra full payment each year, you’ll be reducing the balance of your loan even sooner. This will give you a small push toward building equity at a higher rate than scheduled.
The equity in your home is very valuable. Not only does it add to your net worth, but equity ensures that you don’t find yourself upside-down if you ever need to sell your home. Without enough equity, you could actually wind up paying out of your own pocket when it comes time to sell your home, after closing costs and commissions are paid out.
Your home’s equity is also beneficial if you ever need to take out a home equity loan or home equity line of credit (HELOC). These loan products can be used to finance home repairs, remodeling projects and more.
4. You can drop PMI sooner
If you don’t contribute a down payment of at least 20% when you buy your home, you’ll likely encounter private mortgage insurance (PMI).
PMI is required for homeowners who put less than 20% down when taking out a conventional loan (rather than a government-backed loan). This coverage protects your lender in case you default on your mortgage payments before you have a chance to build up equity.
Once you reach 20% equity in your home, you can ask your lender to cancel your PMI payments. And if you are making biweekly mortgage payments, you’ll get there a lot faster because you’ll be paying down the balance of your loan ahead of schedule.
5. You may find it easier to budget
According to the U.S. Department of Housing and Urban Development (HUD), the median monthly mortgage payment in 2019 (before property taxes, insurance, etc.) was $975. That same year, the median household income was $68,703; this means that mortgage payments accounted for more than 17% of the average family’s budget.
It’s no surprise then that making a lump sum mortgage payment each month can sting, especially when it represents such a large chunk of your income.
If nothing else, biweekly mortgage payments take the stress out of those big payments. If you’re paid biweekly, splitting your mortgage payment makes even more sense — just send in a check each time you get paid, if that’s the due date you agree on with your lender.
This strategy helps you stay on top of your budget and eliminate financial stress. And rather than letting that money sit in your bank account until your due date rolls around (just begging to be spent), making biweekly payments may also keep you from overspending.
Pros and cons of paying a mortgage biweekly
There are many upsides to paying your mortgage every two weeks, but there are also a few things to keep in mind along the way.
- You could pay off your debt faster. By paying your mortgage biweekly, you are able to tackle your loan balance earlier than scheduled, saving you both time and money.
- You spread out the strain of an extra mortgage payment. Rather than making one large additional payment each year, paying biweekly allows you to spread out the 13th payment over the course of the year. This lessens the pinch an extra payment can have on your budget.
- You’ll have a faster way to build equity. Biweekly payments help you pay down your mortgage balance faster, meaning that you own more of your home sooner.
- Your monthly budget may work better. If you get paid biweekly, it could be easier for you to make mortgage payments at the same time, rather than budgeting for one large payment at the end of the month. If you have cash flow and/or overspending concerns, consider whether making a half payment every two weeks would help.
- You can save on PMI. Paying PMI on a home loan is common when you put less than 20% down. To drop this extra monthly fee, you need to build up enough equity. Making biweekly payments can help you get there faster and eliminate PMI fees sooner.
- Your lender may not make it easy. Not all lenders permit automated biweekly payments, so you may need to make manual payments.
- You may have to pay an extra fee. Some lenders charge a fee for processing biweekly payments. This may still be worth it depending on how much you’ll save by paying your mortgage every two weeks (be sure to do the math first). If not, you can achieve the same effect by just setting aside your payment amount in a dedicated savings account, then submitting your larger loan payment once a month.
- Your biweekly payments may not be applied to your balance right away. Some lenders may hold your biweekly payments until the full monthly amount is received, then apply the funds to your loan balance. You’ll still reduce your principal balance early but may not save as much in interest since your payments are only applied once a month.
- You could face prepayment penalties. Some mortgages have prepayment penalties written into the contract. If this is the case with your lender and you plan to pay down your mortgage early, be sure to calculate how much it will cost you in fees to do so.