If you own a home, chances are high that you’re one of the 65% of Americans with a mortgage. For many of us, making a monthly home mortgage payment is simply a fact of life. But did you know you don’t have to pay your mortgage once a month? You’ve actually got options! You can pay monthly, bimonthly, or biweekly.
So before you commit to paying once a month, why not learn about biweekly payments and see if they’re the best option for you? Who knows–you could save thousands in the long run! Each payment structure has pros and cons, and we’ll break down everything you need to know about a bi-weekly payment program.
How do mortgage payments work?
First, let’s review how the typical mortgage payment process works.
When you take out a loan to buy real estate, you negotiate with the lender on terms for a down payment, mortgage interest, and repayment terms. You’ll agree to pay back the amount borrowed plus interest over an agreed-upon period.
Most homeowners agree to a 30-year loan at a fixed rate, but it could be a 15-year loan or an adjustable-rate mortgage (ARM). Either way, each month, the borrower makes a payment towards the loan principal balance and interest, which is determined in part by your loan’s annual percentage rate (APR).
You may think that when you make the payment, you’re making equal payments to the principal and interest. This isn’t the case. Most loans have an amortization schedule, where you’ll pay more on the interest initially. The amortization schedule outlines your payments over time, showing how much the payment goes towards total interest versus principal. Your loan balance decreases, and the amount of interest due each month shrinks as you make more payments.
How to pay your mortgage
Now that you know the basics of how a mortgage works, let’s talk about options for how to pay it off. Generally speaking, most lenders offer two payment plans: monthly or biweekly. Here’s an overview of each:
- Monthly Payment Plan: The traditional route is to pay a lump sum once a month (usually on the first day of each month). With this plan, you pay a set amount each month, and your loan balance will be paid off after the agreed-upon term. This is usually the most convenient option as it’s easy to budget, but it may cost you more over time due to interest payments.
- Biweekly Payment Plan: This is not making partial payments. The mortgage servicer takes the full monthly mortgage payment and slices it in half (or some other predetermined amount) for you to pay every two weeks. So instead of 12 payments per year, you’ll make 26 over a year but still pay the total amount you would have owed each month in the typical repayment structure.
Pros and cons of monthly vs. biweekly mortgage payments
Before selecting one plan or another, consider all your payment options. Here are a few pros and cons to keep in mind when it comes to monthly versus biweekly payments:
Monthly Payment Plan
Pros: Paying each month is convenient as it always happens on the same day each month. Budgeting is also easier as you have a set payment amount, fluctuating only for property taxes and insurance. Plus, many lenders offer automatic mortgage payments drawn directly from your bank account.
Cons: Monthly payments will take longer to pay off the loan. You’ll pay more interest over time, regardless of what kind of loan you have– fixed, adjustable, 15- or 30-year mortgage.
Biweekly Payment Plan
Pros: On the biweekly schedule, you’ll pay off the mortgage balance faster since there are more regular intervals for repayment and fewer days of interest accrual during each billing cycle. This can save you money in the long term because you’re chipping away at the loan faster and thus reducing the total interest you’re paying.
You’ll also build up your home equity faster. If you’re carrying private mortgage insurance (PMI), paying biweekly to increase your equity can help you achieve the 20% mark faster.
Cons: The more frequent payments can be hard to manage financially, depending on your income stream and personal finance management. You have to be on top of your budgeting and payment schedule. Not everyone can afford to make an extra loan payment in the year, especially near the end of the year when expenses are higher for many Americans. Also, some lenders charge prepayment penalties for paying your home loan off early, which you are likely to do on the biweekly plan.
Pro or Con? If you choose to pay bi-weekly, you will have 26 payments per year as opposed to the standard 12. Each payment may be half of what it would be for a monthly amount, but this approach adds up to an additional month’s payment each year. That’s because our months and weeks aren’t divided equally. There are 52 weeks in a year, which divides by 12 to be 4.3 weeks.
It depends on how you look at it. On the pro side, even though one additional payment every 12 months might not appear to make a difference initially, that amount adds up over time. It can be incredibly beneficial in reducing your loan term. Making an extra annual payment may seem inconvenient, but when you spread out the allotted payments throughout the year, it won’t create a significant negative financial impact. On the con side, that extra payment out of your pocket could matter depending on your financial circumstances.
How does the math work?
Let’s say you want to finance $200,000 for a home purchase. If you opt for the 30-year-fixed rate mortgage option at 7% interest, you’ll owe $1,331 a month in principal and interest.
On a biweekly payment schedule, you’ll pay $665.50 every two weeks, which equals $1,331. But because you’re paying over 26 weeks and not 24, you’ll pay an extra $1,331 during the year. And, since you’re paying more frequently plus an extra monthly payment, you pay down the principal faster, leading to less interest owed.
Looking over the life of the loan, on the monthly schedule, you’ll pay $279,017.80 in interest to the lender. On a mortgage biweekly payment plan, you’ll pay $210,092.51 over the life of the loan, a savings of $68,925.28. You’ll also pay off the loan in 284 months versus 360 months, or 6.3 years faster.
You can run a biweekly mortgage calculator to see how the payment savings stack up over time for a specific home-buying scenario.
Why pick biweekly mortgage payments?
It is clear that biweekly and monthly payments have numerous distinctions between them:
- The frequency of payments.
- Length of time needed to repay the mortgage.
- The interest accrued over the life of the loan.
The number of payments you make each year is the most significant difference between the two options. Payment frequency greatly influences how much your mortgage will cost and how long it will take to pay it off. An additional payment each year can pay off your loan quicker than monthly installments. So, if paying off your mortgage early is essential, perhaps biweekly payments are the best choice.
What to watch out for
Your mortgage lender may charge both a setup fee and transactional fees, increasing your costs.
Not all lenders agree to biweekly payments or use a third-party processor to handle the extra processing involved. In that case, the third-party payment processor can tack on extra fees.
Don’t let your money go to waste! Ensure that any lender or processor you use allows for biweekly payments and actually applies them biweekly as intended. If they don’t, you won’t accrue the total savings in interest because your payments will only be applied once a month. The sooner these payments are processed, the more significant benefit to your bank account and debt-to-income ratio!
What are other ways to pay off your mortgage faster?
One of the prime benefits of biweekly payments is owning your home scot-free sooner, but it’s not the only tactic to reach that goal. A few other options:
A loan refinance can lower the interest rate and/or shorten the loan term. Since mortgage rates constantly fluctuate, the interest rates may have dropped since buying the home. If current rates are lower, it will reduce the amount owed in interest payments over time, allowing you to save money and pay off your loan more quickly. A rate-and-term refinance will shift your loan from a 30-year to a 15-year, which can save on interest payments. As a side note: you could refinance to biweekly payments to save even more money.
Extra principal-only payment
Some lenders allow borrowers to make additional one-time payments on their mortgage, called principal-only payments. This can be advantageous if you have extra cash and want to reduce the interest owed. You can make this payment when it’s best for you, at any time of the year, but make sure to communicate with the lender that the additional payment is to be applied to the principal.
Other lenders allow an extra principal payment option, enabling you to make more payments in a year.
What about bimonthly mortgage payments?
Bimonthly mortgage payments are similar to biweekly payments but occur twice a month instead of every two weeks. As a result, the total number of payments you make each year is 24, less than biweekly payments.
Similarly, bimonthly payments reduce your monthly payment by dividing it into two halves and spreading them over the month. A half payment can help to lower your overall monthly expenses, but it won’t change the amount owed at the year’s end. It will take the same time to pay off the loan as traditional monthly payments.
Signing up for biweekly mortgage payments
You should always check with your lender if you make biweekly or bimonthly payments. Different lenders have different rules and fees associated with these payment plans, so it’s important to know what they offer and what the fees will be.
The bottom line
Biweekly or bimonthly payments can effectively save money on your mortgage and decrease the time it takes to pay it off. By maximizing your budget, you can be well on your way to owning your home free and clear!
Keep this alternative payment schedule in mind as you search for homes in the Arrived Homes database.