Your mortgage is probably your biggest monthly expense, and saving money on it could make a significant financial difference in your life. One popular money-saving option you may have heard of is a biweekly mortgage payment plan. It can save you money in the long run, but it will increase your annual expenses for now.
How Normal Monthly Payment Plans Work
With a normal mortgage, you make 12 payments each year, and these payments are typically due on the same day each month. If you follow the monthly payment plan, you will pay off the mortgage within the time frame specified when you took out the loan, which is usually either 15 or 30 years.
The monthly payment has two components. First, your money goes toward paying accrued interest, which is calculated based on your outstanding balance and interest rate. The remaining portion of your payment goes toward reducing the principal balance, lowering the amount you owe on your mortgage.
Early in the repayment period, most of each payment goes toward interest, while only a small portion reduces the loan balance. As your mortgage balance declines over time, the interest portion of each payment decreases as well, allowing more of each payment to go toward paying down the principal.
What Is Different About a Bi-Weekly Payment Plan?
With a bi-weekly mortgage payment plan, you make half of your usual mortgage payment every two weeks instead of making one full payment each month. Because there are 52 weeks in a year, this schedule results in 26 half-payments, which equals 13 full payments annually. This occurs because months are longer than four weeks. For example, if you make a payment every other Friday, some months will have four payments, while others will have five.
The main advantage of a bi-weekly payment plan is that it allows you to pay off your mortgage faster, which reduces the total interest paid over the life of the loan. In months with three bi-weekly payment dates, you effectively make an extra half payment. By the time the third payment is applied, the interest for that month has already been covered, so the remaining amount goes directly toward reducing your principal balance.
For example, on a typical long-term mortgage with a balance of $200,000, switching from monthly payments to bi-weekly payments can shorten the loan term by several years. Instead of paying off the loan over the full 30-year schedule, borrowers may eliminate the debt earlier by consistently making bi-weekly payments.
By adopting a bi-weekly payment strategy, borrowers can reduce total interest costs by tens of thousands of dollars over the life of the loan. This approach works because you effectively make one extra monthly payment each year, which accelerates principal reduction and lowers future interest charges.
What Mortgage Payment Plan Is Best for You?
If you are paid every two weeks, a bi-weekly mortgage payment schedule may feel more natural because it aligns with your paychecks. However, if you are paid monthly or semi-monthly, it may be easier from a budgeting standpoint to stick with traditional monthly payments.
If you are operating on a tight budget, it may make more sense to maintain your regular monthly payment rather than committing to bi-weekly payments. The additional money you would need for extra payments might be better directed toward higher-priority goals, such as paying off high-interest debt or building emergency savings.
The higher your mortgage interest rate, the more beneficial bi-weekly payments tend to be. This is because additional payments reduce your principal balance faster, lowering the amount of interest charged on future payments. When interest rates are lower, the savings impact of making extra payments is typically smaller.
Finally, the closer you are to retirement, the more valuable it can be to eliminate your mortgage and reduce fixed expenses. Making bi-weekly payments can help accelerate the payoff and support the goal of entering retirement with a home owned free and clear.