Biweekly mortgage payments come due once every two weeks. Having more frequent mortgage payments offer a faster and more cost-effective route to paying off your home loan, but only if your mortgage lender credits you for each payment immediately. If your lender receives biweekly payments but continues to calculate your interest on a monthly schedule, you won't actually save on the total cost of interest.
- How Does a Biweekly Mortgage Payment Work?
- Biweekly Mortgage Payment: Calculating Your Savings
- Should You Pay Your Mortgage Monthly or Biweekly?
How Does a Biweekly Mortgage With Extra Payment Work?
While the majority of homeowners make mortgage payments on a monthly basis, some lenders will offer the option of biweekly mortgage payments. This involves dividing the typical monthly payment in half and making a half-payment every two weeks. In a full year, 12 monthly payments of $1,000 would be replaced by 26 biweekly payments of $500 each. Because some months are longer than others, a biweekly plan adds on a full month of extra payment.
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Since each year has 52 weeks, you would make 26 biweekly payments as opposed to 12 monthly payments. This means that with a biweekly mortgage payment plan, you're adding a full month's worth of extra payment every year. Because they reduce principal more quickly and more frequently, biweekly mortgage payments speed up the process of paying off your home and also save on the total cost of interest for your mortgage. Not all mortgage lenders provide servicing for biweekly payments, which means that you may have to pay for a third party to make the arrangements.
In addition, biweekly mortgages aren't the same thing as bimonthly payments. Bimonthly payments are twice a month, and occur on the 1st and 15th of each month. This means that you won't actually make any extra payments compared to a regular monthly plan —you're simply splitting that plan into smaller installments. You're also making two fewer payments than in a biweekly plan (24 vs. 26 each year). Moreover, bimonthly mortgages won't always credit you for the mid-month payment, which means you won't be paying any less interest than with the single monthly payment.
Biweekly Mortgage Payment: Calculating Your Savings
To illustrate the potential savings of a biweekly mortgage payment plan, we used the example of a $200,000 mortgage balance at a fixed 4% interest rate paid off over 30 years. To calculate the number of biweekly payments, we assume a payment amount that's half of the monthly payment.
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Here, the effect of paying down the principal balance at a faster pace allows a borrower with biweekly payments to cut out over $20,000 in lifetime interest and shave more than 4 years off the original 30-year amortization schedule. Biweekly mortgage payments would cost you $955 more per year, but this represents just a single month of extra expenses —an increase of 8% in your annual mortgage costs.
Should You Pay Your Mortgage Monthly or Biweekly?
Paying your mortgage on a biweekly basis will only work if you make sure that your lender will recalculate your principal and interest with every payment. Otherwise, the only effect of the change will be to split your monthly payments in half. While this can help you stay accountable in and of itself, you won't save any money on mortgage interest unless your lender updates your balance every two weeks.
Arranging a biweekly payment plan isn't always free. Depending on your mortgage lender, you may need to pay an upfront fee to a third party that manages the arrangement, along with a recurring fee, or in some cases, a pre-payment penalty, attached to each payment. These extra costs may render the whole exercise pointless if they cancel out the savings you'd get on your interest. In addition, you may find that committing to more frequent payments creates added stress if you have an irregular income.
If you don't have a convenient option for biweekly payments, you might be able to achieve the same savings simply by adding extra payments to a regular mortgage amortization plan. For instance, adding one-twelfth of a monthly payment every month comes out to one full extra payment per year. Assuming you manage to stick to that extra payment for the life of your mortgage, you would save exactly the same amount as a biweekly payment plan and finish repaying your loan at the same time.