How to Make Bi-Weekly Mortgage Payments
Bi-Weekly Payments Can Save Thousands and Shave Years Off Your Mortgage
Chances are that if you own a home, you’re making monthly mortgage payments. The typical mortgage is structured so that you make a single payment each month for a total of twelve payments per year. The good thing about this is that it means you pay the same amount at the same time each month so there are no surprises and it’s easy to budget for.
But what would happen if you split that monthly payment up and made bi-weekly payments instead? Surprisingly, you could save yourself tens of thousands of dollars in interest charges and achieve mortgage debt freedom faster. Here’s how to make bi-weekly mortgage payments work for you.
How Bi-Weekly Payments Work
Generally speaking, the premise of making bi-weekly mortgage payments is simple. Instead of paying once a month, you pay half your monthly mortgage amount due every other week.
The real magic of the bi-weekly payment comes from the fact that there are 52 weeks in a year, giving you 26 total payments. If you were to simply make two payments a month, that would be just 24 payments in a year, so actually, the bi-weekly method has you making two extra payments each year, which is the same as making one extra monthly payment.
Here’s an example. Let’s say your current monthly mortgage payment is $1,000. Over the course of a year, you will spend $12,000 making twelve payments. If you decided to make bi-weekly payments you can then make a $500 payment every two weeks. Seems like the same thing, right?
Well, if you take $500 and multiply it by 26 payments you have $13,000 in total payments. And guess what? That extra $1,000 was applied directly to your principal, thus reducing how much you’ll spend on interest and helping you to pay your mortgage off faster.
Here's another example to help you better understand the true savings. Assuming a $100,000 30-year mortgage at 6.5%, you'll pay $127,544 in interest, plus the $100,000 principal, for a total of $227,544. Paying one-half of your regular monthly mortgage payment every two weeks will result in interest of $97,215, a savings of $30,329.
Obviously, the larger your mortgage and higher your interest rate, the greater the savings in the long run.
How to Make Bi-Weekly Payments Through Your Lender
In many cases, switching to biweekly payments is as simple as asking your lender to alter your current payment plan. It's important, however, to get the timing rate if you're already enrolled in automatic drafts for your payments.
If you switch to biweekly payments in the middle of the month after making your regular mortgage payment, you'll need to schedule your first biweekly payment for the beginning of the next month. Otherwise, you'd be making one and a half payments in the same month, which could put a strain on your budget.
When switching to biweekly payments with your lender, be sure to ask how your payments will be credited. You need to know specifically whether the extra payment that results from making biweekly payments will automatically be applied to the principal. And, you also must make sure that your lender that will immediately credit each half monthly payment upon receipt. If your lender waits until the second payment has been received before crediting your loan, you'll never see the financial benefits of bi-weekly payments.
How to Make Biweekly Payments Yourself
If your lender doesn't offer a biweekly payment option, you can create one for yourself. It's relatively simple to do: divide your monthly mortgage payment by 12, then make one principal-only extra mortgage payment for the resulting amount each month. You're technically still making your regular mortgage payment, plus one smaller extra payment, but the cumulative effect is the same as if you were making biweekly payments automatically.
You could also achieve the same results by making one single extra monthly payment once each year. In this case, it would be considered a lump sum mortgage payment but it could still bring your principal balance down.
Things to Watch Out For
Making bi-weekly payments is a very useful tool, but be careful of scams or special programs that claim they can do this for you. Some companies offer to convert your monthly mortgage payment into bi-weekly payments for a one-time fee of about $400. Run away from these offers. It shouldn’t cost you anything to make extra payments on your own loan.
Also, make sure that making bi-weekly payments fits with your budget. If you're normally paid once a month, for example, you might be used to paying all your bills at once, versus spreading them out. And, if you're paid on a weekly basis, make sure that you're holding enough cash in reserve each week to make your next bi-weekly payment once it becomes due.
Finally, make sure there isn’t a penalty for prepaying your mortgage. Most mortgages these days do not have a prepayment penalty, but there are still some out there that will penalize you for trying to pay off your mortgage early, as doing so robs the lender of some of the interest they would normally be paid. So just be sure that you won’t be doing more harm than good by trying to make extra biweekly payments.