Should You Make Biweekly Mortgage Payments?

Every few months, our mortgage provider reaches out, advocating for a switch to a bi-weekly payment plan. The concept is straightforward: instead of making a single monthly payment, we’d split the payment in half and submit it every two weeks. This results in 26 payments annually, effectively adding one extra payment per year. The rationale behind this approach is to expedite mortgage repayment and reduce overall interest expenses.

The appeal of paying off our mortgage sooner and minimizing interest costs is undeniable. This strategy is particularly attractive for those with bi-weekly pay schedules, as it aligns well with their income frequency and simplifies budgeting. Yet, are these proposals as advantageous as they seem? Here’s what to consider before transitioning to a bi-weekly mortgage plan.

Upon closer examination of these offers, a significant caveat often emerges. Some lenders impose a hefty setup fee, sometimes amounting to several hundred dollars. What’s more, this fee is typically payable upfront. While such charges may have been justified in the pre-digital era of banking, where setting up automatic payments was cumbersome, they seem outdated in today’s digital landscape.

Fortunately, if you already utilize online direct payment for your mortgage, you can replicate the biweekly payment structure at no extra cost. Simply adjust your monthly payment to include an additional amount equivalent to 1/12 of your regular payment. This surplus will be allocated directly to your principal. Once set up, you’ll be effectively making an extra month’s payment each year for the duration of your mortgage term.

It’s worth noting that if you initially establish your mortgage as biweekly, there’s no issue. However, if you seek to switch midway, it’s essential to review the terms carefully.

However, it’s crucial to exercise caution here. Certain lenders may allocate any additional payments you make toward the next scheduled payment rather than directly towards reducing the principal. Consequently, you’re not effectively paying down the principal; instead, you’re simply paying future installments earlier. While this might seem subtle, the outcome is that you still end up paying the interest you aimed to avoid.

To circumvent this issue, it’s advisable to consult your bank before proceeding with setting up biweekly payments. Some banks may require you to specify that the additional payment should be allocated towards reducing the principal rather than advancing future payments. In such cases, you can establish two separate automatic payments: one for the regular mortgage installment and another smaller withdrawal for the extra 1/12 amount. Ensure that you clearly designate the second payment as intended for the principal.

Alternatively, you can align your payments with your biweekly paycheck schedule. By scheduling a payment equivalent to half of your mortgage amount every time you receive a paycheck, you’ll still achieve the goal of making an additional payment annually. This approach accounts for months where you receive three paychecks, enabling you to submit 1.5 times your usual payment and achieve the same outcome as biweekly payments.

One drawback of committing to a biweekly payment schedule is the obligation to make payments every other week. When you voluntarily initiate biweekly payments, you retain the flexibility to discontinue the practice if it becomes financially impractical. However, entering into a biweekly contract with your lender entails sticking to the payment plan without the option to easily change course. While this arrangement may not pose a problem if you receive paychecks biweekly, it could restrict flexibility during months of financial strain.

Conversely, being locked into a plan to build equity can be advantageous. With mortgage payments deducted automatically from your bank account before you have the chance to spend them elsewhere, you’re essentially forced to allocate those funds toward building equity in your home. While this may leave you with less disposable income, it accelerates wealth accumulation by prioritizing equity building over discretionary spending.

Allow me to share a story I heard from a store owner about two neighbors with contrasting financial paths. One neighbor owned a profitable store and enjoyed a comfortable lifestyle, while the other worked a regular job with comparatively less disposable income. Despite their modest means, the latter couple made a strategic investment by purchasing a retail plaza in a less developed area. They sacrificed luxuries and diligently channeled their earnings into paying off the mortgage.

Although it was challenging initially, their commitment to building equity eventually bore fruit. Decades later, they found themselves living in a lavish mansion in the finest neighborhood, with the retail plaza fully paid off and valued at over $20 million. Meanwhile, the store owner, now in his 70s, continues to operate his business to make ends meet and even rents space from his former neighbor.

This tale underscores the power of prioritizing equity building, even if it requires sacrifices in the short term. With strategic planning and perseverance, the rewards can be substantial in the long run.

Biweekly mortgage payments can offer substantial savings, particularly when interest rates are higher. Consider a scenario where you’ve secured a 30-year fixed mortgage at 7%. Opting for biweekly payments right from the start would allow you to pay off the home in less than 24 years, saving over $33,500 in interest for every $100,000 of principal. That’s an enticing proposition.

Conversely, if the same loan carries a lower interest rate, say 3%, which is closer to the current average, biweekly payments would take over 26 years to clear the loan. In this case, the savings in interest would amount to roughly $7,139 per $100,000 of principal.

While biweekly payments can be beneficial regardless of interest rates, their impact is more pronounced when rates are higher.

If accelerating your home payoff is a priority for you, biweekly mortgage payments can be an effective strategy. However, it’s important to recognize that you can implement this strategy independently without incurring any fees from your bank.

When exploring mortgage options, consider the various payment frequencies available. You can opt for monthly payments, bimonthly payments (on the 1st and 15th), or biweekly payments. Some lenders even offer accelerated payment schedules, allowing you to contribute extra towards the principal with each payment.

Assess your financial situation and goals to determine which payment plan aligns best with your budget and objectives. Whether you prioritize cash flow or rapid equity buildup, choose the approach that suits your needs.