Q: I refinanced last year ago and received an offer to pay my mortgage biweekly instead of monthly. How does this help to reduce my mortgage costs and loan term more quickly than with monthly payments? If it does, how/where can I apply to do this? Is there a calculator available on your site to compare this option?
A: Making biweekly payments on your mortgage will absolutely cut your interest cost and shorten the term of your loan, to boot. Usually done though an auto-debit arrangement from an account you specify, the mortgage lender will sweep though that account every two weeks and collect exactly half of your required monthly payment.
How do biweekly mortgage payments work?
While there are only 12 months per year, there are actually 26 two-week periods. This means you are essentially making 13 monthly payments per year. In today's market, and if started from the first monthly payment, this reduces the term of a 30-year loan to about 26.75 years, saving you a bundle in interest costs.
How much are the savings from paying biweekly?
How much you'll save depends on three things: The interest rate on the mortgage, the length of the mortgage term and when you start making biweekly payments. The greatest benefit comes from making biweekly payments starting at the very beginning of a high-rate mortgage with a long term. There's less benefit when the loan term is shorter or the loan has a low interest rate (you're already paying less interest) or if you start making payments later along in the term of the loan. That's because the earliest mortgage payments contain the greatest amount of interest.
All that said, by way of example, on a $200,000 30-year mortgage at 3.5 percent, (and if started from the first payment), paying biweekly will cut the total term of your loan 44 months, while shaving off about $17,000 in interest cost. By comparison for a 15-year term at a 3% rate, starting biweekly payments at the beginning of the loan will trim about $4,600 in interest cost and shorten the term by about 17 months.
Biweekly payments can produce valuable savings, but there's no magic to them. In fact, if you are both responsible and dedicated, you can simply send in one full extra monthly payment once per year and achieve nearly the same savings. The biweekly plan just makes it happen automatically.
That said, you should check the fine print of any offer to make biweekly payments. While it's okay for a lender or third-party firm to charge you a one-time set up fee, watch out for any recurring transaction fees which can diminish your savings over time.
If the offer to make biweekly payments came from a third-party firm, you should check with your lender or servicer before you sign up. They may offer this option to you at lesser or even no cost.
To compare regular payments versus biweekly payments, use our mortgage calculator to see how you can save money with biweekly mortgage (or other) prepayments. Or, if you have a specific pay-off date in mind, be sure to try our It’s My Term Prepayment Calculator.
There are other ways to prepay your mortgage that can generate savings, too, but prepaying your mortgage may or may not be the best use of any excess funds you have available. To get the complete picture on managing your mortgage, you should read HSH's Comprehensive Mortgage Prepayment Guide.
