How To Use Biweekly Payments To Pay Off Your Mortgage Faster
There are certain expenses that we all anticipate each month. If you own a home, one of these regular payments is likely for your mortgage.
By default, mortgage loans are repaid in 12 equal payments throughout the year, for the duration of your loan term. However, by making a small change in how and when you make those loan payments, you can reduce the total interest paid and satisfy your mortgage debt faster than planned. It’s all thanks to biweekly payments.
Let’s take a look at what biweekly mortgage payments are, the impact they can have on your finances, and why you should consider setting them up if you want to save money and time on your mortgage loan.
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All About Biweekly Mortgage Payments
Mortgage loans are typically set up the same way. Once you’ve chosen your loan term (such as 15 or 30 years), your lender will establish a set monthly payment. You will make this payment once a month every month until the loan is satisfied, for 12 equal payments a year.
With biweekly payments, however, you’ll make a partial payment every two weeks instead. Simply divide your standard mortgage loan in half and that’s your biweekly payment.
How Does Paying Your Mortgage Biweekly Work?
Interest on mortgage loans is typically calculated on a monthly basis. This means that the lower your principal balance, the lower the interest charged will be.
By paying biweekly, you’ll reduce your principal balance just a little bit extra, prior to that monthly interest being calculated. These savings will add up month after month, not only reducing your total mortgage interest, but also paying off your loan sooner.
You’ll Pay Your Mortgage Off Faster
So, just how much sooner would you pay off a mortgage with biweekly payments, versus standard monthly payments? Let’s look at the math.
There are 52 weeks in a year, which means that with biweekly payments, you’ll make a total of 26 contributions toward your home mortgage. At the end of the year, that actually equates to 13 full monthly payments … versus the 12 you would have made with your standard repayment schedule.
This additional payment each year can significantly reduce your principal balance, meaning that you’ll pay off your home even faster than planned.
Let’s say that you have a $200,000 mortgage loan at a rate of 4.00% for 30 years. If you pay according to your lender’s standard amortization schedule, your loan will take you 30 years to repay.
However, by paying biweekly – and essentially making one extra monthly payment a year – you’ll actually pay your loan off midway through year 25. Think of all the things you could do being mortgage-free for nearly 5 extra years!
|Standard Repayment Timeline||Biweekly Repayment Timeline|
($200K mortgage for 30 years at 4.00%)
End of year 30
|Midway through year 25|
You’ll Pay Less In Interest
Let’s use the same mortgage loan as our previous example ($200,000 for 30 years at 4.00%), to see how biweekly payments can impact your total mortgage interest paid.
With a 4.00% home loan, you’ll pay somewhere in the neighborhood of $143,740 in interest over the life of your repayment if you make standard monthly payments as scheduled. However, by splitting that monthly payment in half and making a partial payment every 2 weeks, you’ll reduce that by tens of thousands!
|Standard 30-Year Repayment||Biweekly Payments||Total Savings|
|Mortgage Interest Paid||$143,740||$120,360||$23,380|
In this example, you would save $23,390 over the life of your mortgage just by making biweekly payments. (In addition to the 4.5 years saved, which we already mentioned!)
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It’s Easier To Make Extra Payments
Most homeowners recognize the benefit of making extra mortgage payments. However, it can be difficult to actually find the funds to do so over the course of the year.
By scheduling biweekly payments, you can make this process easier on the budget. It effectively divides one extra mortgage payment by 26, and spreads it out over the course of a year.
While this does require you to adjust your monthly budget slightly – and ensure that your cash flow is set up to allow for biweekly payments – the schedule makes it easier to contribute extra toward your mortgage principal each year.
Making Biweekly Mortgage Payments
There are some lenders that allow you to automate biweekly payments. This feature makes it easy for you to pay down your mortgage loan faster and for less, without having to even think about the process.
If your lender does not offer such an option, though, you’ll need to take matters into your own hands. This can be done a handful of different ways; here’s a look at your three alternatives.
Option 1. You can split your monthly payment in half, logging into your account every two weeks to make a payment. Your savings will be the same as if your lender allows you to schedule biweekly payments.
This option requires you to stay on top of these manual payments, however; if you forget to make the second payment one month, you may be charged a late fee by your lender.
Option 2. Automate your regular monthly mortgage payment, taking the legwork out of your lender’s requirement. Then, each month you can make an additional principal payment equal to one-twelfth of your monthly amount due; at the end of the year, you will have made one extra mortgage payment and significantly reduced your principal balance due.
Option 3. Simply make an additional (full) mortgage payment each year, in the month that works best for you. This one lump payment will go toward reducing your principal balance, though it won’t save you as much in interest as if you’d made regular contributions throughout the year.
Should I Make Biweekly Mortgage Payments?
Your home is likely the biggest purchase you will ever make. Even with an interest rate in the single digits, this can often mean tens or hundreds of thousands in interest charges over the life of your repayment – a significant chunk of change that you probably wouldn’t mind keeping in your pocket.
By making biweekly mortgage payments, you can reduce your overall mortgage interest paid. Not only that, but you can pay off your home loan earlier than scheduled, eliminating that monthly mortgage payment and freeing up your budget even faster.
Luckily, lenders like Quicken Loans® make biweekly payments simple for clients. Thanks to Rocket Mortgage®, these borrowers can set up biweekly mortgage payments for free online. There are no prepayment penalties or fees for setting up a revised payment schedule, either, so you’re able to automate the process and save yourself money with just a few quick clicks.
What could you do with those kinds of savings? For other articles like this one, check out our free personal finance resource center for more information.
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