When you buy a home with a mortgage, your payments are due monthly by default. In an effort to pay off their mortgages faster and pay less in interest over the loan’s lifetime, some homeowners choose to make biweekly payments instead.
But depending on how your biweekly payments are handled, they may not help you make the dent in principal you intend. Here’s what you need to know if you’re considering switching from monthly to biweekly payments.
Why switch to biweekly payments?
If you pay your mortgage monthly, like most homeowners, you’re making 12 payments a year. When you enroll in a biweekly payment program, you’re paying half your monthly amount once every two weeks instead. There are 52 weeks in a year, so this works out to 26 biweekly payments — or, in effect, 13 monthly payments.
“Because you’re making the equivalent of 13 monthly payments each year, you’ll pay less total interest while lowering your principal balance at a much quicker pace,” says Joe Zeibert, managing director of Ally Home, a division of Ally Bank in Charlotte, North Carolina.
Zeibert gives the example of a 30-year fixed loan of $250,000 at a 4% interest rate. “Biweekly payments would save a borrower nearly $30,000 in interest charges and have the loan paid off in five fewer years,” he says. Even if homeowners stayed in their home for only seven years, they would still save several thousand dollars in interest charges while paying off $10,000 more in principal, which they could then use toward a larger down payment on their next home, Zeibert says.
Beware of payment processing companies
Some mortgage lenders offer biweekly payment options. For example, Navy Federal Credit Union offers a dedicated program for those who want to make payments every two weeks indefinitely, says Kevin Torres, a mortgage product strategist at the credit union. It also has a free Budget Easy program that lets you make those biweekly payments automatically if you want or switch back to monthly payments if your finances change.
Here’s where things get tricky: When lenders don’t offer a biweekly payment option, some borrowers turn to third-party services that do. However, these payment processing companies charge a setup fee in the range of $300. Some also charge monthly fees, and it may be hard to get out of the contract once it begins.
Even worse, some of these services simply hold onto your second payment for two weeks and just make monthly payments on your behalf, nullifying the impact of one extra annual payment. So if you get contacted by a company offering to save you thousands by handling your mortgage payments, tread carefully.
How to do it yourself
The good news is that if your lender doesn’t offer a biweekly payment option, you can take matters into your own hands.
Take your monthly mortgage payment and divide it by 12. Make an extra principal-only payment of that amount every month. Or save that amount every month for 12 months in a separate savings account, then make one extra mortgage payment for that year using the total, which is the equivalent of how much extra you would pay annually on a biweekly plan.
Before you go this route, however, confirm with your lender that there are no prepayment penalties on your loan and that the extra payments will be applied entirely to your loan’s principal rather than to principal plus interest.
“Biweekly payments are certainly worth making if your finances allow for it,” Torres says. You can use a biweekly mortgage payment calculator to estimate your potential savings.