A biweekly mortgage is a mortgage for which one-half payment is made every other week instead of a full payment made once per month. The homeowner makes 13 payments per year instead of the usual twelve, which accelerates the loan's payoff schedule by approximately 6 years.
Bi-weekly mortgages are marketed as a cheaper way to own your home faster. But do bi-weekly and other extra payment mortgage programs actually work? Is it worth it to sign up for a program committing you to one extra payment per year on your mortgage? Or, is it cheaper to refinance into a loan with low costs? Understanding your options is the first way to make sure you're making a good choice. Read more about bi-weekly mortgages below.
The Regular Mortgage: 12 Payments Per Year
The typical mortgage asks for one payment per month, which equals 12 payments per year. With a 30-year fixed rate mortgage, therefore, 360 payments are required to pay the loan in full. Each mortgage payment is split into two parts -- a principal portion and an interest portion. The principal portion is applied to the amount that you owe the bank. This diminishes your remaining loan balance.
The interest portion is your cost for borrowing from the bank.
As your loan moves toward maturity, the balance between your mortgage payments' principal-and-interest shifts. In the early years, a significant portion of your payment is comprised of interest and just a small part goes to paying down your balance. It's not until later in your loan's lifecycle does the principal portion of the payment start to grow.
The Bi-Weekly Mortgage: 13 Payments Per Year
A bi-weekly mortgage payment program is meant to short-circuit your loan's amortization schedule. Instead of making 12 payments per year, the bi-weekly payment plan asks for one payment every two weeks, which adds up to 13 payments per year. Except that you can't make 13 payments per year on your mortgage -- that's not how a mortgage works. With a mortgage, you pay a certain amount of interest on an annual basis and that amount is covered in your first twelve payments. The 13th payment has to go somewhere, though, so it gets applied to your principal balance; the amount that you still owe to the bank. And, this is how a bi-weekly payment plan works. With each "13th payment", your loan balance is reduced by the entire amount of the payment. You reach your loan's payoff date sooner. At today's mortgage rates, bi-weekly payments shorten your loan term by 4 years.
Should You Use A Bi-Weekly Mortgage Program Offered by Your Loan Servicer?
Unfortunately, these mortgage payment plans don’t always work as well as they claim. What actually happens is that you send in your biweekly payment to the company servicing the loan, and then they hold your payment until the second one arrives. Once they receive the full monthly payment amount do they apply the money to your mortgage - which means as far as the mortgage company is concerned, you’re still making one payment per month.
Ultimately, you save nothing in interest because your funds are still only being applied as if you were making monthly payments. Worse yet, some biweekly mortgage payment plans can actually ending up costing you more money, because they often charge additional fees to handle and deliver the payments for you.
How Can I Pay Off My Mortgage Early On My Own?
Paying extra on your mortgage to pay off the loan early is something you can actually do yourself. You can make biweekly payments yourself directly bypassing the loan servicer and avoiding any extra fees which allows you to make one extra mortgage payment each year. You can also continue to pay monthly but make one extra mortgage payment at some time during the year to get the same result. Just be sure to specify that any extra payments you make are applied to the principal of your loan. You should check with your mortgage company before doing that to be sure that there is not a prepayment penalty in the terms of your loan.
An Even Better Option? Shave 63% More Months Off Your Mortgage
With current mortgage rates low, the best alternative to a bi-weekly mortgage plan may be to refinance into a new home loan completely. Taking a refinance to lower rates and putting your monthly savings back into your mortgage as "extra payments" each month accelerates your loan payoff faster than a bi-weekly program ever could.
Assuming a 1% drop in your mortgage rate, putting your monthly mortgage savings back into your loan can shorten your loan's term 63% more than any bi-weekly program. The plan works even better with a zero-closing cost refinance, meaning all closing costs are paid by your lender in exchange for the homeowner willfully accepting a slightly higher mortgage rate. In general, a $250,000 refinance can be converted to a zero-closing cost refinance for a 0.125% increase to your mortgage rate.