Should You Make Biweekly Mortgage Payments?
Biweekly mortgage payments are a good idea under the right circumstances: they can save you thousands of dollars in interest and help you pay off your mortgage faster. But under the wrong circumstances, it may accomplish nothing or even cost you money.
Here are the ins and outs of this payment strategy to help you decide whether it’s right for you.
What Is a Biweekly Mortgage Payment?
The default way to pay your mortgage is monthly, because mortgage payments are typically due once a month. If you pay biweekly, you’ll make half of your monthly principal and interest payment every two weeks instead. That’s 26 half payments a year, or the equivalent of 13 full payments a year, instead of 12.
Here’s another way to look at it. For every $100,000 you borrow at 4% for 30 years, you’ll pay an extra $477.42 toward your mortgage each year. Your monthly and annual payments would look like this:
Pros and Cons of Biweekly Mortgage Payments
Paying less interest and getting out of debt faster are enticing reasons to make biweekly mortgage payments. But your plan might not work out as well as you expect if you don’t understand how to manage the downsides.
- Pay less interest. The higher your interest rate and the more you’ve borrowed, the more you could save. If you have a $300,000 mortgage at 4% for 30 years, biweekly payments will save you $35,000 in interest payments. If you have a $200,000 mortgage at 3% for 30 years, biweekly payments will save you $14,280.
- Repay your mortgage faster. Accumulate equity faster by paying more principal and you’ll be mortgage free sooner. Using the previous examples, you’d pay off your loan in about 25.5 years and a little over 26 years, respectively.
- Smooth out your cash flow. If you get paid biweekly, you might prefer to pay your mortgage biweekly as well. You might find it easier to manage your income and expenses by matching them up this way, especially if your housing payment is your largest expense.
- Higher housing expenses. More frequent mortgage payments means less money for other things. Saving for retirement, paying off debt or even taking a vacation to visit family might be better uses of your money.
- Increased borrowing costs if you need the money later. Once you pay extra mortgage principal, you can’t just ask your lender to give it back if you’re short on cash. The only way to access cash faster is with a new loan: a cash-out refinance, a home equity loan or a home equity line of credit (HELOC).
- Your lender might not allow it. Check page 4 of your mortgage closing disclosure to see if your lender will apply partial payments to your loan. If you don’t have your closing disclosure or if you took out your loan back when lenders used HUD-1 statements, contact your mortgage servicer to ask about their biweekly payment policy or look on its website.
Is a Biweekly Mortgage Payment Right for Me?
Now that you know the pros and cons of making biweekly mortgage payments, you can evaluate how this strategy applies to your situation.
Consider Your Other Debts
Let’s say your mortgage interest rate is 4% and your other debts include an auto loan at 2%, a student loan at 6% and a credit card at 16%. Putting extra money toward your mortgage (or auto loan) won’t save you as much as putting extra money toward your student loan or credit card which have higher interest rates. Retiring those debts faster will likely have a greater financial benefit in the near term.
Check Your Emergency Fund
Prepaying your mortgage doesn’t make sense unless you have a robust emergency fund with at least six months of expenses saved up. If an unexpected bill arises, you don’t want to be caught off guard and have to borrow money to pay it after putting all your extra cash toward your home loan.
Check Your Loan Terms
The mortgage paperwork you signed when you took out your home loan should specify whether your lender will apply partial payments. Some lenders won’t accept them at all, and others will hold them until you’ve sent in enough for a full payment. If your lender is going to handle your payment like that, you’ll need to use a different strategy, as discussed below.
Another concern you might have is whether your loan has a prepayment penalty. If you took out your loan before January 10, 2014, check your mortgage paperwork or contact your mortgage servicer to find out (and get the answer in writing). If you took out your loan on or after January 10, 2014, your loan probably doesn’t have a prepayment penalty. Even if it does, the penalty probably does not apply unless you’re repaying the entire mortgage within three years of closing.
How to Set Up a Biweekly Mortgage Payment
If you want to pay your mortgage biweekly, there are several ways to do it, and one method to avoid.
- Check your mortgage servicer’s website. Some lenders offer an easy way for borrowers to make biweekly payments. But those systems don’t always benefit borrowers as much as they could because the lender might only apply your payments when you’ve paid enough to make a full monthly payment. You’ll still end up making extra principal payments, but they’ll only be applied twice a year, with your 13th and 26th biweekly payments instead of a smaller amount every two weeks.
- Call your mortgage servicer. Some mortgage servicers don’t have sophisticated online systems. You might need to call to ask about their policy on applying biweekly payments and whether they have a plan you can enroll in. Get any agreement in writing.
- Do it yourself. You don’t have to sign up for an official biweekly payment plan to save money on interest and pay off your loan sooner. You can send your lender extra money, but make sure it’s very clearly marked as an extra payment toward the principal amount. Your lender’s online payment portal may even allow you to do this automatically if you want to make the same additional principal payment each month.
- Avoid third-party providers. There’s no reason to pay someone else to do what you can easily do for free. Plus, biweekly mortgage payment companies might just collect your money every two weeks and only send it to your lender monthly, bringing you little-to-no benefit.