How to Use Biweekly Mortgage Payments to Pay Off Your Home Loan ASAP (original) (raw)
With this popular method, you may not even notice the extra money going toward your loan.
Aly J. Yale
Written by
Contributor, Buy Side from WSJ
Aly J. Yale is a contributor to Buy Side from WSJ and a personal finance journalist with work featured in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.
Updated September 10, 2024, 11:41 AM EDT
A simple change to when you make your mortgage payments can save you thousands of dollars—and a few years—on your mortgage obligation.
Many people dream of saying goodbye to their mortgage and living debt-free. Perhaps the most popular method for doing this is making biweekly mortgage payments. These are just what they sound like. Instead of paying your mortgage once a month, you pay every two weeks.
Here’s how it works: You take your required monthly mortgage payment and divide it evenly in two. Then, you make that half-payment every two weeks. If your mortgage payment is 3,000,forexample,you’dpay3,000, for example, you’d pay 3,000,forexample,you’dpay1,500 today, and then the other $1,500 two weeks from now.
You’d then continue that process every two weeks for the rest of the year—ideally with automatic payments you can set and forget. Because the calendar doesn’t split months evenly, you’ll end up making 26 half-payments over the course of the year, or 13 total monthly payments, instead of 12.
“I’m a big proponent of biweekly mortgage payments,” says David Johnston, a certified financial planner and managing partner of Amwell Ridge Wealth Management in Flemington, N.J. “It’s a way to accelerate your mortgage payoff without hefty lump sums.”
How much can you save with biweekly mortgage payments?
The exact amount of savings you’ll see by making biweekly mortgage payments depends on your loan size, interest rate, loan term, and other factors.
“Paying biweekly will save you thousands of dollars over the term of your loan since it’ll be paid off earlier,” says Steven Conners, founder and president of Conners Wealth Management in Scottsdale, Ariz.
Here’s a look at how making biweekly payments would alter a $500,000 mortgage loan with a 6.5% rate.
| | Monthly payments | Biweekly payments | | | ----------------------- | --------------------- | ---------------- | | Loan amount | 500,000∣500,000 | 500,000∣500,000 | | Payment amount | 3,160monthly∣3,160 monthly | 3,160monthly∣1,580 biweekly | | Payments per year | 12 full payments | 26 half payments | | Payoff date | Year 30 | Year 24 | | Total interest paid | 637,722∣637,722 | 637,722∣486,076 | | Savings | – | $149,646 |
While cash savings are likely the biggest benefit of making biweekly mortgage payments, there are other perks, too. Paying your loan off earlier, for example, can lighten your financial load as a household, freeing up cash flow to put toward other things—such as investments or your retirement account.
Biweekly payments also allow you to build equity faster. “They act as an equity booster,” says Mike Roberts, co-founder of City Creek Mortgage in Draper, Utah. “The quicker you pay down the principal, the more equity you build in the home.”
Roberts says this extra equity could prove “invaluable” later on if you opt to refinance your loan or take out a home equity loan or HELOC. (Lenders typically won’t allow you to do either unless you’ll still have at least 20% equity.)
Finally, for many homeowners, biweekly payments align better with some paycheck schedules. For example, if you get paid every two weeks, it may be simpler to manage cash flow if your mortgage payments align with your paydays.
“By dividing the payment in half and aligning it with your pay cycle, it may be easier on your overall budget,” says Rachel Caballero, community development manager at TruWest Credit Union in Tempe, Ariz.
There can be downsides to biweekly payments, too. There may be fees from your lender, it could be hard to remember the payments (unless you set up autopay) and you might be taking away cash from other financial goals, such as paying down higher-interest debts or saving for retirement.
Setting up biweekly mortgage payments
With all their benefits, it might be tempting just to divide that payment in half and start biweekly payments right away. But before you dive in, you’ll need to contact your lender or loan servicer.
First, not all servicers will allow you to make biweekly payments. And if yours does, you need to make sure they’ll apply the payment to your principal at the time of payment—not just on your payment’s due date.
“You need to confirm with your servicer that the biweekly payments will actually be applied to your principal,” Roberts says. “Some servicers might hold the extra payments in an escrow account until the end of the month, negating the benefits.”
This essentially means they’ll put the payments in a holding account until your actual due date rolls around. This would keep your earlier-in-the-month payments from reducing your principal balance (and the interest you’re charged on it) as intended.
You should also ask if there’s a fee for setting up or processing biweekly payments. It might seem silly to charge a fee when the lender is actually getting bigger payments from you, but remember those interest savings.
“Less interest cost for you is less interest income for them,” says Troy A. Young, a certified financial planner and founder of Destiny Financial Group in Atlanta.
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Meet the contributor
Aly J. Yale is a contributor to Buy Side from WSJ and a personal finance journalist with work featured in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.