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Is a Biweekly Mortgage Payments Plan Right For You?

By Casey Slide

mortgage biweekly paymentsMy husband and I have owned a house for nearly three years, and we are constantly getting solicitations in the mail about paying our mortgage biweekly.

The letter typically goes on to say how many years you can shave off your mortgage payments and how much you can save in interest. The numbers are pretty astounding, which makes these plans tempting.

Here is some information on biweekly mortgage payments, as well as the pros and cons, to help you decide if it’s the right plan for you.

How Do Biweekly Mortgage Plans Work?

Biweekly mortgage plans split your monthly mortgage bill in half and every two weeks, you pay the halved amount. Since there are 52 weeks in a year, you will end up making 26 payments which equates to 13 monthly mortgage payments. This extra payment will go towards the principal, which results in a reduced amount of interest. The plans are typically set up by the lender or an appointed marketing company.

Let’s look at a sample scenario. Say you have a principal of $186,281, an interest rate of 5%, and a 30-year mortgage (360 months). Your monthly payment would be $1,000, or $12,000 per year. Over the lifetime of the mortgage, you would pay $173,717.81 in interest. If you made biweekly payments instead, they would be $500, or $13,000 per year. This would reduce your interest to about $143,000 and shorten the life of the mortgage by about 5 years. That is a savings of almost $31,000!

Note: Biweekly mortgage plans are different from semimonthly (or bimonthly) mortgage plans. With a semimonthly mortgage plan, payments are made twice a month (such as on the 1st and the 15th). This saves you very little money. In fact, some lenders will only apply your payments to your loan once a month, which will save you nothing (though this may be help you keep track of your finances if you pay twice a month.)

Pros & Cons of Biweekly Mortgage Payments

Pros:

  • You will pay less in interest over the life of the mortgage.
  • Your mortgage will be paid off faster.
  • If you pay biweekly, the amount of your paycheck going towards housing will always be the same. Thus, budgeting and personal finance will be made easier.
  • The plan essentially compels you to make extra mortgage payments.

Cons:

  • Your lender or the appointed marketing company may charge a fee to set you up on the plan. Typically, it is around $300, and can also include a fee for each biweekly payment.
  • If you bought a home at the top of your price range, you may not have the money to commit to paying extra on your mortgage each year.

4 Alternative Ways to Save on Your Mortgage

Although the pros of a biweekly mortgage plan are appealing, there are some other things that you can do to save money on your mortgage and avoid the mortgage fees and commitment to the plan.

1. Pay More Towards Principal
If you want to avoid the fees of the biweekly mortgage plan, just pay an extra one-twelfth of your mortgage payment each month. You should have the option to pay more towards principal on your payment coupon. If you do not select this option, your lender may apply the extra amount to your next month’s payment. This will save you hundreds of dollars in fees and thousands of dollars in interest! Just be sure that the terms of your loan doesn’t include a mortgage prepayment penalty.

2. Refinance
Depending on how much you still owe on your mortgage and what interest rate you can get, refinancing your home mortgage loan might be a great option for you. If you think refinancing might be the path you want to take, talk to your mortgage broker to see how much you can save and if it would be worth the fees associated with refinancing. Consider getting a shorter mortgage term as well.

3. Downsize
Downsizing your home and your life by moving to a smaller living space can save you a ton of money. Not only will you have a lower mortgage, you can also save on utilities. You can also sell items on Amazon or eBay when you downsize.

4. Rent Out Your Space
If you have an extra room, consider renting it out. Just make sure that you vet your potential roommates to make sure they’re trustworthy, and draw up a rental agreement to protect yourself. Be warned that there are many responsibilities attached to becoming a landlord.

Final Word

Once we took the pros and cons into account, my husband and I decided to pass on the biweekly mortgage payment plan. As great as it would be to pay less in interest and get our mortgage paid off faster (only 27 more years to go!), I do not want to pay the fees when there is an alternative. This will also provide us more flexibility. If we are able to put more towards our principal in any given month, then we will do it ourselves when we make our payment.

What do you think about biweekly mortgage plans?

(photo credit: Shutterstock)

Casey Slide
Casey Slide lives with her husband and baby in Atlanta, GA. She graduated from the University of Florida in 2005 with a bachelor’s degree in Industrial Engineering and worked for a prominent hospital in Atlanta. With the birth of Casey’s son in February 2010, she decided to become a stay-at-home mom. Casey’s interests include reading, running, living green, and saving money.

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  • http://www.moneybeagle.com Money Beagle

    As you mentioned, you can easily do the same thing yourself by adding 1/12th of your payment on each month, and you won’t pay the bank any service fees to do so. I get a letter from our bank about once a month or so wanting us to switch to this plan, all for the cost of $375 to set it up.

    Frankly, as I said, I can do it myself automatically PLUS by handling it myself, I can adjust the amounts if financial priorities change. I certainly wouldn’t want to be in a situation where I lost my job, but if I did, it’d be nice to just cancel the extra payments versus being on the hook and having to try to work something out with the bank (and potentially losing your house).

    • Casey Slide

      Yep, exactly my thoughts too. Thanks, Money Beagle!

    • http://www.creditcardassist.com Steve Sildon

      Money Beagle’s got it right here. Being able to control the payment yourself by paying down principle as you see fit is a better option. We’ve been paying $200 over and above our mortgage payment for years. Didn’t cost us a thing and on occasion we’ve been able to bump that payment up or down in line with our monthly cash flow.

  • http://www.joetaxpayer.com JoeTaxpayer

    I consider the bi-weekly to be a bit of a ripoff. You get to pay 8.3% more and cut your mortgage time from 30 to 25 or so, fair enough, but you get no rate drop. For those who are a few years into their 30 year mortgage, and have, say 26 years left, a drop to a 20 yr term may also drop your rate a bit and in the end, raise your payment not much more than the effective 8% of going bi-weekly.
    As you mention, one can always may extra principal payments herself. Put aside that half payment every two weeks and make the extra payment when you accumulate it twice per year, that classic calendar month that contain 3 paychecks.

    • Casey Slide

      JoeTaxpayer, thanks for your comment! I hadn’t thought about that there is no rate drop for going biweekly.

  • http://firstgenamerican.com First Gen American

    I never even entertained bi-weekly. I pay my bills monthly and the mortgage is one of those bills that I don’t autopay because I like to pay extra on it, but my amount of extra varied month to month.

    I’m a big fan of reducing mortgage interest. $173K is a lot of money to be paying a bank.

    • Casey Slide

      Oh, the amount paid in interest is shocking. You can buy another house with the amount you pay in interest over 30 years! Good luck to you.

  • http://tmgbooks.com TMG

    The cost to set up the biweekly payments should not be a factor in your decision because when you compare it to what you can save the return-on-investment is huge.

    The reason I don’t do it is for the reasons already mentioned: I do not want to get locked in to the payments and I can accomplish the principal buy-down as readily on my own and I retain maximum control by doing so.

    As to the benefits of principal reduction, I have mixed feelings. For most people, I think the goal of paying off your mortgage sooner rather than later should be a priority.

    On the other hand, the way a thirty year mortgage is structured, pre-payments only act to save you the cheapest part of that mortgage. Here’s why: In twenty years, due to inflation, you will be paying the last ten years with dollars worth a lot less than the dollars you are spending today to invest in your mortgage.

    To look at this another way, consider the percentage of your gross income that you are spending on your monthly mortgage payment today and, then consider how that percentage is shrinking each time you get a pay raise. If that percentage is 25% today, it five years it will likely be less than 20% and in ten years less than 15%.

    And, during the last ten years of a mortgage the largest percentage of the mortgage payment is being applied to principal so is simply shape-shifting from cash to equity.

    What I do is make an extra payment every year. This will reduce the term by almost five years and cost me the least in terms of flexibility and current spending power. The key is that you do plan to pay off a mortgage as part of your march to financial independence.

    • Casey Slide

      That is an interesting way to look at it. I hadn’t thought about that. Thank you for contributing!

  • http://www.money-and-kids.com/ Brad Castro

    Great article and ensuing conversation.

    We have our homeowners insurance and property taxes rolled into our mortgage payment. As a result, due to the adjustments in escrow withholdings from one year to the next, there are some fluctuations in what our official mortgage payments are.

    To me, what was most important was having a set and stable payment for the long term (i.e. we didn’t want to see our housing costs rise and we didn’t want to get used to temporary lower payments following state legislation related to insurance or property tax reform)

    So we ended up picking a set payment amount comfortably above what was due, applying the excess to the principal. That worked great . . . until we were annexed by the city and saw our property taxes rise by nearly 50%.

    • Casey Slide

      Wow, that is crazy! We have had an increase in property taxes as well which has increased our escrow, but not nearly that much. You have a great suggestion though about picking a set payment above the amount due. I really like that idea. It would be very practical for me and my husband as our rates adjust each year.

      • http://www.money-and-kids.com/ Brad Castro

        Thanks – Originally I wanted to retain the escrow refunds we were due at the end of the cycle back in the escrow account to keep the payments as low as possible, but apparently it wasn’t legally possible.

  • http://www.blackshoeblog.com/ Ralph

    Fine exploration on how biweekly mortgage plans may work. I think some people might find this introduction quite useful.

    • Casey Slide

      Thank you, Ralph! I appreciate your feedback.

  • Josh

    WellsFargo offers this option for nothing – and since both my wife and I get paid bi-weekly, it made great sense. We bought well under what we could “afford” and not only do we pay bi-weekly, we also overpay, putting those funds to principal. It’s also worth noting that WF automatically puts overpayment to principal – so notwithstanding our overpayment, the bi-weekly plan amounts to an extra monthly payment per year that goes straight to principal. Now I sound like an ad for WF, tho I’m not… just like their program, and we were positioned well for it.

    • Jstaub2000

      I was under the impression that with biweekly payments that every 2 weeks my payment was applied to my loan which over a period of time would pay down the principal much quicker. But I guess there isn’t a program like that these days. Bummer.

  • Guest

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  • Ram Kumar

    You can also get in touch through Skype mediator_ram

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