Should you make biweekly mortgage payments?

If you’re looking to reduce interest and pay off your mortgage early, you’ll want to consider making biweekly payments.

Biweekly payments, or payments every other week, amount to one extra monthly payment on your mortgage each year, which means paying less interest on your mortgage over time. Paying biweekly may feel too aggressive for your current budget, but the math behind this small "trick" makes it easier to pay down your mortgage faster, with minimal impact on your monthly budget and current lifestyle.

Here’s how biweekly mortgage payments work, and what you’ll need to do to set them up.

• How biweekly mortgage payments work
• How to set up biweekly mortgage payments
• Pros and cons of paying your mortgage biweekly
• Biweekly mortgage payments and your loan terms
• Is a biweekly mortgage payment right for you?

How biweekly mortgage payments work

On a standard, 30-year mortgage loan, the typical repayment arrangement is to pay once a month, every month, for 30 years. Biweekly mortgage payments mean you pay every other week instead of just once each month.

Since there are 52 weeks in a year, 26 biweekly payments mean you make 13 monthly payments each year instead of the standard 12. This one extra payment substantially shortens the lifespan of the loan and reduces the amount of total interest you’ll pay.

For example, say you have a $300,000 home loan with a 4% interest rate. Your mortgage payment is $1,432.25, and you decide to make one additional monthly payment each year (which comes out to $119.35 per month). This’ll shorten the payoff on a 30-year mortgage by five years and save you over $35,000 in interest over the life of the loan.

HOW TO AVOID A MORTGAGE PREPAYMENT PENALTY

How to set up biweekly mortgage payments

Depending on the lender, you may already have access to a dedicated biweekly mortgage payment program. The good news is that even if you don’t, it's easy to set up a biweekly payment system all on your own.

Through a lender program

These days, most lenders offer the ability to easily make additional payments online. Log in to your servicer’s online portal to see the payment options available to you.

• In addition to making a monthly payment, setting up autopay, and making additional payments, there may be an option to pay biweekly.
• For any extra payment/biweekly payment option online, make sure the entire payment is applied directly to your principal balance.

You’ll also want to be wary of any third-party payment providers offering to make biweekly payments on your behalf. Pay special attention to their terms and conditions. These services often charge fees that’ll eat into your interest savings.

By yourself

Before setting up any kind of additional payment plan, double check the terms of your loan to see if your lender or loan servicer charges any kind of prepayment penalty. A prepayment penalty is a fee lenders charge if you pay off your mortgage early.

The good news is prepayment penalties usually only apply if you refinance your home, sell the home, or pay off a large chunk of your loan at once. If you’re only paying small amounts of extra principal each month, you likely won’t need to worry about prepayment penalties. Nonetheless, double check with your lender or loan servicer to confirm.

You can set up a biweekly mortgage repayment in two ways:

• Schedule an auto draft through your lender’s online payment portal for every other week in a calendar year.
• Make an additional payment toward the principal at the end of each month.

If you decide on the latter option, simply take your normal monthly payment ($1,432.25 in the $300,000 example above) and divide by 12. Using our example, this comes out to $119.35. So, at the end of each month, you’ll make an additional principal-only payment of $119.35.

Be sure to mark any additional payments as principal only. Your lender should have an option to do this. This ensures the money goes toward your loan amount and not the interest for the next month. If the money goes toward prepaying interest, you won’t end up saving anything over the life of the loan, which is why it’s important not to skip this step.

Pros and cons of paying your mortgage biweekly

The biggest draw to making biweekly mortgage payments is the substantial amount you can save on mortgage interest. Still, paying biweekly (and the possible savings) may not make sense for every budget.

Pros

• Shortens loan term — Paying biweekly means you’re making one additional, full monthly payment each year, which can substantially shorten the time it takes to pay off your mortgage, often by a couple of years.
• Saves money — Over time, the savings in interest could fund a large purchase such as a kitchen renovation, a college tuition payment, or a contribution toward retirement.
• Extra payments go toward principal — Any extra mortgage payments reduce the principal of the loan, which means each time you make an extra payment you pay less in interest and own a little bit more of your home.

Cons

• Possibility for prepayment penalties or service fees — Even if your lender or loan servicer doesn’t charge a prepayment penalty, any additional payments may incur service charges or processing fees.
• May strain your budget — If you have other higher interest debt obligations in addition to your mortgage, the money for an additional mortgage payment may be better suited toward paying off those debts first. Focusing on paying down a debt at 17% interest, for example, will save more money in the long run and benefit your credit than shaving down a 30-year mortgage at 5% interest.
• Potential administrative headache — If additional payment options aren’t readily available from your loan servicer online, contact a representative from the company and ask them if they’d be able to accommodate your request. Otherwise, making extra payments by yourself may create additional administrative headaches for you each month in terms of tracking down the payments and ensuring they’re being put toward your loan principal and not interest.

SHOULD I CLEAN OUT MY 401(K) TO PAY OFF MY MORTGAGE?

Biweekly mortgage payments and your loan terms

Biweekly mortgage payments have the greatest impact on mortgages with high balances, longer terms, and higher interest rates. They substantially shave time off a 30-year mortgage, but less over a 15-year loan.

• 30-year term — Returning to our previous example, say you have a $300,000 mortgage with a 4% interest rate and use biweekly payments to make the equivalent of an additional $1,432.25 mortgage payment every year. Over the course of the loan, you’d pay off your loan five years early and save over $35,000 in interest.
• 15-year term — Now say you have the same $300,000 loan amount and 4% interest rate, but on a 15-year mortgage. With biweekly payments, you’d make the equivalent of an additional $2,219.06 mortgage payment every year. Over the course of the loan, you’d pay off your loan two years early and save over $11,000 in interest.

JUMBO LOANS: EVERYTHING YOU NEED TO KNOW

Is a biweekly mortgage payment right for you?

Ultimately, it’s your loan balance and you can pay how you want, but there are limits. Even if your servicer doesn’t offer an easy biweekly repayment option, most servicers do allow additional payments on a monthly or annual basis.

Paying biweekly may feel too aggressive for your current budget, but the math behind this small "trick" makes it easier to pay down your mortgage faster, with minimal impact on your monthly budget and current lifestyle. If you’re looking to shave a few years off your mortgage, save money on interest, have little high-interest debt, and can easily float an additional $100 to $200 per month for the extra payment, biweekly mortgage payments may be the perfect option for you.