A biweekly mortgage payment means you pay half of your monthly mortgage payment every two weeks. Because there are 52 weeks in a year, 26 half-payments equal 13 full monthly payments. The extra payment each year goes entirely toward your principal balance. Over the life of a 30-year mortgage, biweekly payments cut 4 to 6 years off the loan term and save tens of thousands of dollars in interest.
The math is simple. The execution is where things go wrong. Third-party companies charge hundreds of dollars in setup fees and ongoing transaction fees to do something you can do yourself for free. Here is how biweekly payments actually work, how to set them up without paying a fee, and when they are not the best use of your money.
The Math: Why 26 Half-Payments Saves So Much Interest
A standard monthly mortgage requires 12 payments per year. A biweekly schedule makes 26 half-payments per year. Twenty-six half-payments is 13 full payments. The 13th payment is applied entirely to your principal balance because the 12 regular payments have already covered the interest and principal for the year. The 13th payment reduces your principal directly. A lower principal means less interest accrues the following month. The effect compounds. Each extra principal payment reduces the balance on which future interest is calculated. Over years, the compounding effect of early principal reduction shortens the loan term.
On a 30-year fixed-rate mortgage of $300,000 at 6.5 percent, monthly payments are $1,896. Biweekly payments of $948 every two weeks pay off the loan in approximately 25 years instead of 30. The total interest savings over the life of the loan is approximately $72,000. The homeowner makes 5 fewer years of payments and saves an amount equal to roughly 25 percent of the original loan balance in interest.
The savings come from the extra principal payment, not from paying twice a month. If you pay twice a month but make only 24 half-payments per year instead of 26, there is no savings. The frequency of the payment does not matter. The extra payment matters. Paying biweekly is a convenient way to make an extra principal payment each year because the half-payment amount is smaller and easier to budget than a full extra payment.
How to Set Up Biweekly Payments Without Paying a Fee
Check whether your lender offers a free biweekly payment program. Many major mortgage servicers do. The lender applies each half-payment as it is received and automatically applies the extra payment to principal. There is no setup fee, no monthly transaction fee, and no third party between you and your lender. This is the ideal arrangement. Call your mortgage servicer and ask whether they offer a biweekly draft program at no cost. If they do, enroll through them. Do not sign up with a third party.
If your lender does not offer a free program, you can replicate biweekly payments yourself. Open a separate checking account. Set up an automatic transfer of half your mortgage payment from your main account to this account every two weeks. Set up your monthly mortgage payment to draft from this account on the first of each month. Once a year, the account will accumulate an extra half-payment because 26 half-payments have been deposited but only 24 half-payments have been withdrawn. Send that accumulated amount as an extra principal payment through your lender’s website, by check with the next coupon, or by phone. Mark the payment as principal only. This method costs nothing beyond the time to open a second checking account and set up the transfers. Most banks allow you to open an additional savings or checking account online in minutes with no minimum balance and no monthly fee.
Alternatively, simply add an extra one-twelfth of your monthly payment to each month’s payment and mark it as extra principal. On a $1,896 monthly payment, add $158 per month as extra principal. The result is the same as biweekly payments over the course of the year. You do not need a special payment schedule to achieve the same savings.
The Third-Party Biweekly Services You Should Avoid
Companies advertise biweekly mortgage payment programs that promise to save you thousands. They charge a setup fee of $200 to $500 and a transaction fee of $2 to $10 for each payment they process. They withdraw half your payment every two weeks from your bank account, hold the money, and make your full monthly payment to your lender on the due date. Once a year, they make the extra payment from the accumulated funds.
These companies are selling a service you can perform yourself. The setup fee alone is more than the interest you save in the first year. The ongoing transaction fees further reduce the net savings. Over the life of the loan, the fees can consume 10 to 20 percent of the interest savings that biweekly payments generate. The companies are not a scam in the legal sense. They disclose their fees and they perform the service as advertised. They are a poor financial decision when a free alternative exists.
An additional risk of third-party services is that they hold your money between withdrawals and mortgage payments. Your money sits in the company’s account, not your lender’s account. If the company has financial problems or fails to make a payment on time, you are responsible for the late payment to your lender. The mortgage is in your name. The company is a payment intermediary with no obligation to your lender. Your credit and your home are at risk for their mistake.
When Biweekly Payments Are Not the Best Use of Your Money
You have higher-interest debt. If you carry credit card debt at 18 to 25 percent interest, paying that off saves far more money than accelerating a 6.5 percent mortgage. The math is straightforward. Every dollar applied to credit card debt earns a guaranteed 18 to 25 percent return in avoided interest. Every dollar applied to extra mortgage principal earns a guaranteed 6.5 percent return. Pay the credit card first. The mortgage can wait.
You do not have an emergency fund. Extra mortgage principal payments are not a substitute for cash in the bank. Once you make an extra principal payment, you cannot get the money back without refinancing or taking out a home equity loan. If you lose your job, the lender does not credit you for the extra payments you made. Your monthly payment is still due. Build an emergency fund of 3 to 6 months of expenses before accelerating your mortgage.
Your mortgage has a prepayment penalty. Most conventional mortgages do not, but some older loans and some subprime loans include a penalty for paying off the loan early. The penalty typically applies if you pay off the entire loan within a specified period, usually 3 to 5 years. Extra principal payments that do not fully pay off the loan are usually not subject to the penalty, but check your loan documents before starting a biweekly program.
You plan to sell or refinance within 3 years. The interest savings from biweekly payments are back-loaded. The largest savings occur in the later years of the mortgage when the principal balance is lower and the extra payments represent a larger percentage of the remaining balance. In the first 3 years, the savings are modest. If you sell or refinance before the savings compound, the benefit of the extra payments is limited to the equity you build, not the interest you save.
Frequently Asked Questions
Is biweekly the same as making one extra payment per year?
Yes. The financial outcome is identical. Biweekly payments is a budgeting method that makes the extra payment automatic and spreads it across the year in smaller amounts. Making one extra payment in December when you receive a bonus produces the same interest savings. The method does not matter. The extra principal payment matters.
How do I make sure my extra payment goes to principal and not next month’s payment?
When you make an extra payment through your lender’s website, there is usually a checkbox or a dropdown menu to apply the payment to principal only. If you mail a check, write principal only on the memo line and include the mortgage coupon for the current month with the regular payment amount. Do not send the extra payment with a future month’s coupon. The lender may treat it as an early payment of the next installment rather than a principal reduction. Confirm on your next mortgage statement that the extra payment reduced your principal balance by the full amount of the extra payment. If it was applied to next month’s payment instead, call your lender and ask them to reapply it to principal.
Can I recast my mortgage instead of making biweekly payments?
Mortgage recasting is a different strategy. You make a large lump-sum principal payment, typically $5,000 or more, and the lender re-amortizes your loan over the remaining term at the same interest rate. Your monthly payment decreases because the principal balance is lower. Recasting reduces your monthly obligation. Biweekly payments reduce your loan term but do not change your monthly payment. Recasting is useful when you want to lower your monthly costs. Biweekly payments are useful when you want to pay off the loan faster. Some lenders offer recasting for a fee of $250 to $500. Not all loans are eligible for recasting. FHA and VA loans typically are not.
