Several different mortgage repayment options exist to help you repay your loan early. One of the easiest and most affordable strategies is the biweekly mortgage payment. By simply paying half your monthly mortgage payment every two weeks, you can save thousands of dollars in interest and repay your loan several years early. At first glance, you might not think this makes sense but we’ll show you the proof in the pudding.
How Much Do You Pay Each Month With Biweekly Payments?
Let’s assume you currently make one monthly payment of $1,000 for your mortgage or $12,000 a month for 30 years. With the biweekly mortgage payment, you make a $500 payment every two weeks. In most months, you will still only spend $1,000, but you will make two extra payments in the year and pay $13,000 a year for up to 26 years. That’s four fewer years of payments for one extra monthly payment!
Since you will make two payments each month, you are guaranteed to never miss your monthly due date. Do make sure the lender receives your second payment before the due date, just in case your second payment is scheduled near your current monthly due date.
For two months, you will make a third payment of $500, or $1,500 for the month instead of the usual $1,000 each month.
In 2018, for example, you might make an extra payment in January and July if you make your first biweekly payment on Monday, January 1st and every two Mondays after that.
How Much Can You Save on Interest?
You wouldn’t believe that one extra minimum monthly payment a year would help you repay your mortgage several years early. Here’s why. Mortgage loan interest (amortization) is calculated differently than your other bank loan interest that uses the simple interest method, where you essentially pay the same amount in principle and interest each month.
With a home mortgage, most of your monthly payment for the first few years pays the acrrued interest first and any remaining amount is applied to the principal. On a 30-year mortgage, it might not be until the 12th year when the at least half of your $1,000 payment is being applied to the principal instead of interest. By starting biweekly mortgage payments as early as possible, you will save more money because the extra payment amounts are applied directly to the principal which in turn reduces how quickly the interest accrues.
If your regular monthly mortgage payment is $1,000 a month, biweekly payments can save you $22,000 in interest on a 30-year mortgage with a 3.75% interest rate.
The graphic below shows your starting balance at the beginning of each payment year below. The lefthand column is by only making the standard monthly payment of $1,000. Notice how much lower your principal balance is each year in the righthand column by making the extra payment each year!
A Few Tips on Maximizing Your Biweekly Payments
Biweekly payments might be the easiest way to payoff your mortgage quickly without breaking the bank. To do so, follow these tips to help you become debt-free as soon as possible.
Make Sure Your Bank Applies The Extra Payment To The Principal Balance
By default, most banks will not apply the extra payment to the borrowed principal. They consider the extra payments a “prepayment” for next month so you can theoretically “skip” a monthly payment and not be penalized.
Go online or call your bank and request that any extra payment amount is applied to any accrued interest since the last payment and the principal. If you don’t, you can miss out on some of the most valuable interest savings in the early years.
Develop a Payment Schedule
With online bill payments, it’s easier than ever to make sure to don’t forget to make your two extra half-payments. You know your finances best and when your other bills are due and when you have the $500 in your account to make both payments.
Most mortgage lenders let you schedule your payments online and create a customized payment schedule. If you get paid on the 1st and 15th, you might decide to have your bank withdraw a half payment on those days. Then, you can send a one-time payment of $500 for the two extra half-payments you must make each year.
Set a Payment Reminder
However you organize your schedule, circle the scheduled payment dates in your planner, wall calendar, or phone. If you have money in multiple bank accounts, setting a reminder a few days before can be good practice to make sure you have enough money in your bank account to afford the payment.
Or you might decide to only create a reminder for your two extra payments. The reminders will help you remember to make that third payment every six months and to make sure you can afford it.
Hopefully, you have been setting aside a few dollars ($30 a month for a $500 payment) so you don’t have to scramble at the last-minute to find an extra $500 or pull from your emergency fund.
Start Making Biweekly Payments As Early As Possible
The sooner you start making extra payments the better, even if you decide to stick with the single monthly payment and only decide to contribute an extra $10 a month because that’s all you can afford.
You will save the most money on a 30-year mortgage, but even on a small, 15-year mortgage, you can still save a few thousand dollars. That money can be used for any variety of uses and be more productive than giving it to the lender in the form of an interest payment.
Even if you’re in the last half of your mortgage life, do make extra payments. You won’t save as much in interest as if you started biweekly payments from the start, but something is always better than nothing.
If you want to make extra payments on your mortgage but don’t know how, give biweekly payments a try. This debt payoff method is budget-friendly but still requires you to commit to making a sizable, extra payment and not an extra $10 or $15 when you feel like it or remember. If you need a little debt payoff motivation, just think of everything you can do with the extra thousands or tens of thousands of dollars that would have just gone to the bank if you continued to only make the minimum monthly payment for 30 years.