Should You Make Bi-Weekly Mortgage Payments Instead of Monthly Payments?
If you’re ready to own your own space, it’s time to buy a house. Owning a home can provide stability and an opportunity to build home equity.
But when it comes to managing a mortgage payment, you might be unaware of different payment schedules available to you.
Did you know there’s an option to make bi-weekly mortgage payments instead of monthly?
Here’s what you need to know about a bi-weekly mortgage, including why some homeowners opt to make multiple payments within a month.
How Does a Bi-Weekly Mortgage Work?
A bi-weekly mortgage payment involves making a mortgage payment every other week.
Typically, homeowners only think about their home loan payment once a month. And for many people, this is enough.
However, bi-weekly mortgage payments can be financially rewarding in the long run.
It means you'll pay off your mortgage balance years sooner.
Making an adjustment in how you make your payments might seem to have little impact.
Yet, bi-weekly payments are a simple, effortless way to pay less interest over the life of your mortgage.
Plus, these payments can put a dent in your principal balance sooner.
- With a normal monthly payment schedule, you’ll make 12 full mortgage payments within a year.
- With a bi-weekly payment schedule, you end up making one extra mortgage payment each year.
Over time, the extra payments eat away at your principal balance faster.
Since you’re paying down your principal sooner, you also pay less interest on your mortgage.
The extra payment per year
There are 52 weeks in a year.
So when you pay half of your mortgage payment every other week, this is the equivalent of 26 half-payments a year.
In other words, 13 full payments a year— the equivalent of an extra monthly payment.
Your mortgage lender applies the extra payment to your principal balance.
This extra payment can have a big effect on the length of your loan term.
Choosing a bi-weekly mortgage payment schedule can potentially reduce your mortgage term by 4 to 5 years, on average.
Many people select a 30-year mortgage because it comes with an affordable loan payment.
But if given a choice, they might prefer to pay off their mortgage sooner.
Choosing a bi-weekly payment schedule offers the best of both worlds.
When you reduce your principal balance sooner, you’ll not only pay off your house quicker. You’ll also build equity faster.
A home with substantial equity opens the door to home equity loans or home equity lines of credit in the future. Equity solutions can help finance home improvement projects and increase your property’s value.
Also, building equity faster can protect your property from negative equity. This can happen when home values decline.
One of the biggest benefits of paying down your balance sooner is the opportunity to drop private mortgage insurance quicker.
Private mortgage insurance, or PMI, is an added expense when you purchase a home with less than a 20 percent down payment. It’s paid monthly with your mortgage payment.
If you have a conventional home loan, many lenders will drop PMI once you have 20 percent to 22 percent equity in your home.
The major downside of a bi-weekly mortgage is that setting up the plan with a lender or a third-party company can be expensive.
Sometimes, it can costs hundreds of dollars.
In addition, bi-weekly payments are permanent agreements.
Also, they don’t always result in an extra payment each year—more on this later.
Do All Mortgage Lenders Offer Bi-Weekly Mortgages?
But while you might like the idea of having a bi-weekly mortgage payment, some lenders don’t offer this option.
They only allow monthly mortgage payments.
They might not accept partial payments you make on your own.
And unfortunately, when a lender does offer a bi-weekly payment option, they don’t always make it clear that this is a permanent agreement.
So you don’t have the flexibility to switch back and forth between monthly payments and bi-weekly payments.
Missing a bi-weekly payment or paying late will likely result in a late fee. This applies even if you make the full mortgage payment within the month.
Should You Use a Third-Party Service to Make Bi-Weekly Payments?
A mortgage lender that doesn’t offer a bi-weekly payment schedule might allow these payments through a third-party service.
You’ll need to set up the plan on your own.
But while this is an option, be mindful that many third-party services also charge a setup fee and a monthly fee. This is because they’re making mortgage payments on your behalf.
Know how extra payments are applied
Be cautious when using a third-party service, though.
If you set up a bi-weekly payment schedule with your mortgage lender, they know how to process each payment. They’ll apply your payments to your mortgage balance as they are received.
This isn’t always the case when working with third-party services.
Rather than pay your mortgage payments every other week—as they should—they might hold onto your extra payment during the month. And then make one payment on your behalf each month.
The problem with this approach is that you don’t actually make 26 half-payments each year.
Therefore, your payments aren’t equivalent to one extra payment a year—despite the company charging a fee for this service.
Not to say you can’t or shouldn’t use a third-party service.
Just make sure you understand how the service works. Ask questions and confirm that the company will forward payments to your lender every other week.
How to Make Bi-Weekly Payments on Your Own
Does your mortgage lender allow bi-weekly payments?
If so, think twice before committing to this payment schedule.
It’s a permanent arrangement.
So your lender will expect a payment every other week regardless of any changes to your financial situation.
To be on the safe side, it might be better to commit to a regular monthly payment. And then make bi-weekly payments on your own.
Here’s how to do this:
1. Pay a little more toward your mortgage each month
Does your lender accept partial payments? If so, you can pay half of your mortgage payment every other week.
Then again, maybe your lender doesn’t accept partial payments.
If not, divide your mortgage payment by 12, and then add this much to each monthly payment.
So if you have a monthly mortgage payment of $1,200, add an extra $100 to your payment each month for a total payment of $1,300.
At the end of the year, you would have made the equivalent of one extra mortgage payment.
For this to work, though, the extra $100 payment must be a principal-only payment.
If you pay your mortgage by check, send two separate checks.
- The first check should be for your normal mortgage payment, indicated in the memo section.
- The second check should be for the extra payment. On this check, write “principal-only” in the memo section.
If you don’t indicate principal-only, your mortgage lender may apply the extra payment to the principal and interest due.
If you make your mortgage payment online, the payment form may include an option to make an extra principal payment.
2. Make an extra principal payment each year
Another option is to make one extra principal-only payment each year.
You can do this when you get a work bonus, a tax refund, or make the extra payment on your mortgage anniversary.
Send a separate check notifying your lender to apply the additional payment to the principal balance.
3. Apply extra paychecks to your principal
If you’re paid every other week, take advantage of months where you’ll receive three paychecks.
This happens about two times a year.
Take that extra paycheck and make an extra principal payment.
Depending on how much disposable income you have, don’t stop with one extra payment a year.
Maybe you can make two extra mortgage payments a year and reduce your mortgage term even further.
Final Word: Should You Make Bi-Weekly Payments?
Bi-weekly mortgages aren’t the right option for everyone.
This payment schedule involves excellent budgeting skills.
You’ll need to set aside half of your mortgage payment every other week. Plus, you’ll need to plan your other bills around the extra payment.
If you’re committed to paying off your home loan sooner, this mortgage schedule can put a nice dent in your principal balance.
Talk with your mortgage lender to see if this is an option. Make sure you understand how the bank handles bi-weekly payments.
Only commit to a bi-weekly mortgage when payments are applied to your balance every other week.
If not, make extra principal payments on your own.