There is a lot to be said for paying off your mortgage early. One way you can do that is by enrolling to have your mortgage payment deducted from your bank account on a biweekly (every two weeks) basis rather than on a monthly schedule.
Some mortgage lenders and servicers encourage borrowers to switch to this plan. While it seems like a good idea, you need to be careful. There are advantages to paying your mortgage biweekly, but your lender’s plan may not be the best plan for you.
How Biweekly Mortgage Payments Work
Before we dig into the pros and cons, let’s break down how a biweekly mortgage payment really functions. It might not operate exactly how you think it does.
There are 52 weeks a year, so if you pay half of your total monthly mortgage payment every other week, you end up making 26 payments.
If you pay twice a month all year on a traditional mortgage, you make 24 payments in that time.
The biweekly method of mortgage payments actually causes you to make two extra “half” payments per year or the equivalent of one extra monthly payment over the course of the year.
So far, so good, right? Let’s look at some of the pros and cons beneath the surface.
Biweekly Mortgage Payment Example
To highlight the merits of a biweekly plan, let’s look at an example.
Here’s what a biweekly mortgage payment looks like in action:
If your mortgage is $1200 per month, you pay $14,400 per year in once-a-month payments. If you decided to make biweekly payments instead, then you would send $600 every other week.
It sounds the same until you realize you’ll be sending 26 payments of $600 instead of 24 payments of $600.
The extra $1200 is applied to your mortgage principal, which pays your mortgage off sooner and reduces the amount of money you pay for interest.
The larger your mortgage and the higher your interest rate, the greater your savings. To give you an idea, on a $100,000, 30-year fixed mortgage with 6.5% interest, you can expect about $127,544 in interest on top of the $100,000. If you pay half the mortgage payment every two weeks instead of making once-a-month payments, you save over $30,000 in interest!
- As common sense and the example above show, the biweekly mortgage does pay off your mortgage faster. Say you’re paying a 30-year traditional mortgage. With a biweekly plan, you could be finished in around 26 years. Who doesn’t want to own their home and be debt-free in the shortest amount of time possible?
- Biweekly mortgage payments work well with budgets. You pay the same amount, from the same place, at the same time every two weeks.
- You could save on interest since the payments are geared towards the principal.
- You’re building equity faster.
At this point, you might be asking yourself where you can sign up.
Don’t Google those enrollment plans just yet, because you’re about to see the other side of the coin.
Biweekly Mortgage Payment Plans May Come with High Fees
Above was an example of an ideal biweekly mortgage plan. We’re now going to turn to an instance highlighting the dark side of biweekly payments.
Search the terms Paymap and 2015, and you’ll be met with a slew of articles detailing their payout to disillusioned homeowners on biweekly mortgage plans.
That year, the Consumer Financial Protection Bureau fined the Western Union subsidiary $5 million and required them to pay back over $33 million in fees to customers.
Why? The fees tied to the biweekly mortgage plan were unjustified, and the estimated savings on the interest they marketed were baseless and wildly exaggerated.
Let’s dig into those points and examine some of the risks of biweekly mortgage payments.
- Not all, but some banks and third-party finance managers do charge you fees to enroll in a biweekly mortgage payment plan. Worse still, a number of them charge continued transaction fees.
- The Paymap case is a great point of reference here. Many biweekly payment programs tout impressive numbers with questionable methodology. Just because the Smiths saved over $33,000 (the number Paymap advertised) on interest doesn’t mean you will. On a similar note, a lot of companies claim you’re paying down your principal every two weeks but actually only submit your payment to the mortgage servicers monthly.
You Pay More.
- While making 26 payments a month means you finish paying your mortgage earlier, it also means paying more. A full extra mortgage payment a year can put a strain on homeowners’ budgeting for a multitude of expenses.
It’s Not Ideal when Something Unexpected Happens.
- Job loss, health problems, and accidents are inevitable. Despite the draw of a biweekly mortgage when life runs smoothly, it can be detrimental to one’s credit and well-being in trying times.
Is There a Better Use for the Extra Money?
You should also consider other uses for the extra money you’ll be putting toward your mortgage if you sign up for biweekly payments. If you still have other debt with higher interest rates, it might be in your best interest to pay that down first.
Any savings you get from making a biweekly mortgage payment could be negated by the higher interest you are paying on credit cards. You might be better off putting that extra mortgage payment toward debt reduction.
Another consideration is to build an emergency fund. If you already have an emergency fund in place, then consider how that money could be working harder for you. In some cases, you might decide it would be better to put that extra mortgage payment amount in your retirement account. There is a chance that you will see better returns on that money, offsetting the interest you might have saved with biweekly mortgage payments and an early mortgage payoff.
In the end, it’s about figuring out the best use for your money. Consider your financial goals and what you are willing to risk. You should only enroll in a biweekly mortgage payment plan if it makes sense in your situation.
Pros & Cons of Biweekly Mortgage Payments
- Save Tens of Thousands in Interest Payments Throughout Your Home Loan
- Shave Years off Your Mortgage
- Build Equity Faster
- Easy for Budgeting
- Some Biweekly Mortgage Plans Include Hefty Fees
- Only Works if Your Home Loan Does Not Have Prepayment Penalties
- Might Not Work for Some Budgets
- You Still Need to Be Able to Pay Extra on Your Mortage
- Some People May Have a Higher Priority Use for Their Money (such as paying off higher interest loans)
- It Can Be Just as Easy to Include Additional Principal Payments with Your Monthly Payment
Should You Enroll in Biweekly Mortgage Payments?
Enrolling in a biweekly mortgage payment plan is an incredibly enticing idea: pay your mortgage twice a month, and you’ll make an extra home loan payment each year. You’ll own your home sooner and save on interest.
With any financial decision, though, you have to weigh all the factors.
With biweekly mortgage payments, it’s not the premise that’s flawed but the fine print.
If you’re intrigued by the idea but you’re uncertain about entering into any contracts, then you can always do it yourself.
Here’s what it boils down to: With a biweekly plan, you’re essentially paying for automation, but you’re also entering into a contract.
As long as there is no penalty for paying off your mortgage early, nothing is stopping you.
If the perks of biweekly payments appeal to you, ditch the third parties and contracts, make your own biweekly payments, and reap the benefits, no fees needed.