If you are a homeowner with a conventional mortgage who makes monthly payments on your home, you may have heard about biweekly mortgage payment programs as an alternative to traditional payment plans.
The way to do this is by paying biweekly mortgage payments versus monthly payments. The logic is that increasing the frequency of the payments reduces the interest that builds up and, over the course of a 30- or 15-year mortgage, that can equal years of payments eliminated from your loan.
Before you sign up for these biweekly payments, it may be wise to examine if this logic is actually true and will save you money.
Key Takeaways
- Some biweekly payment programs offered by lenders are not the best financial choice for the homeowner.
- Committing to biweekly mortgage payments can be difficult on a tight budget.
- Biweekly mortgage payments do not necessarily improve your credit score.
- Making additional paymentstowards the principalof your mortgage is a way to reduce your interest payments over the life of the loan.You don't need a formal agreement to do this.
- In any case, make sure your mortgage doesn't come with an early prepayment penalty. That will damage any strategy for paying off the loan early.
Will Switching to Biweekly Payments Boost My Credit Score?
Some people believe that making biweekly payments improves their credit, but this is a myth, according to experts.
Using a biweekly payment schedule set up by your mortgage lender puts you on an automatic withdrawal plan that assures that your payments are made on time.
If you're the type of person who misses payments from time to time because you forgot to write the check, an automatic payment schedule will improve your credit because your payments will be on time. But you can get the same advantage with an automatic monthly payment.
Will Biweekly Payments Reduce the Interest I Pay?
This may be a myth. Why? Because, depending on the particulars of your loan, there is a good chance that the company receiving your mortgage payment isn't the company that holds the loan.
Although you're paying twice per month, the servicer receiving your payment isn't making biweekly payments to the company that owns your loan. It's more likely that they're likely holding the payment in an account until the end of the month.
But will you still be reducing the interest that is building up over time? Yes. Remember that each calendar year has 52 weeks. If each month has four weeks that equals 48 weeks. So, biweekly payments don't consist of two payments each month but rather add up to 26 half payments—the equivalent of 13 monthly payments in a year.
Ask in Advance
Some mortgage companies don't accept biweekly payments on mortgages, so you should ask ahead of time before signing up for a biweekly payment plan through a third-party lender.
How Does the Math Work on Biweekly Mortgage Payments?
It works like this: Biweekly payments are equal to 13 monthly payments in a year while traditional monthly payments are equal to 12 payments each year.
By paying an extra month every year, you're paying extra principal, which shaves six to eight years off the life of the loan over time.
But do you have to make biweekly payments to do that? Instead, you could divide the total of one month's payment by 12 and add that amount to your monthly mortgage payment.
If you're paying $1,500 per month, divide 1,500 by 12 and make your monthly payment $1,625. Talk to your mortgage company first to make sure there isn't something more you have to do to make sure the extra money is applied to the principal amount of your loan.
What's Wrong with Biweekly Mortgage Payments?
There are potentially two problems with going with a lender's biweekly payment program:
- There are often fees attached to this payment plan. That eats into the amount you're saving by accelerating your repayment schedule.
- You may, like most American consumers, already have enough contractual payment obligations in your life. Unless you have significant financial reserves, you might want to keep some flexibility in your budget rather than committing to biweekly payments.
Remember, you can always make an extra payment when you get three paychecks in a month, receive a tax refund, or come into a windfall. You don't have to contractually obligate yourself to do it every month.
Why Are Biweekly Mortgage Payments a Good Idea?
There are a couple of benefits to biweekly mortgage payments. They include:
- Paying off your mortgage faster, and paying less interest over the life of the loan.
- Building equity in your home faster.
What Are the Downsides of Biweekly Mortgage Payments?
Signing a formal agreement to make biweekly mortgage payments has a couple of potential downsides:
- There are often fees involved and they will eat into the amount you're saving by increasing your annual mortgage payment.
- You're locking yourself into a commitment to pay a larger amount every year. If your budget takes a hit from another direction, you could regret that.
What Are Other Ways I Can Pay Down My Mortgage Faster and Cheaper?
You can pay off your mortgage earlier and reduce your interest costs without committing to a biweekly mortgage payment. For example, you can use a bonus or an unexpected windfall to pay off a chunk of your mortgage. If you get a tax refund, put the money against your mortgage.
Whatever you do, make sure that you contact your mortgage holder in advance and make sure that your extra payment will be applied against the principal of your mortgage loan.
The Bottom Line
There are ways to pay down a mortgage without signing up for a plan that may come with fees attached. The benefits may not outweigh the gains of a biweekly mortgage.
If you are considering a biweekly payment program to lower your mortgage, it may be wise to investigate whether the plan available through your bank or mortgage service provider works for your budget.
