Bi-Weekly Mortgage Payments Vs. Monthly Mortgage Payments
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- With bi-weekly mortgage payments, you divide your monthly payment in half and pay it every two weeks.
- This payment schedule can help you save money on interest and build your home equity faster.
- You should think about your goals and talk to your lender before setting up bi-weekly mortgage payments.
When you take out a mortgage, you will need to make a payment on the same day each month. But some homeowners are switching to bi-weekly payments to pay less over the life of the loan.
Sarah Sprague Gerber, CFP® Professional and Founder of Dynamic financial planning, says bi-weekly mortgage payments can help you save money on interest and build equity in your home faster. But first you need to check that your lender allows bi-weekly payments and that the money you pay will go towards the principal.
What are bi-weekly mortgage payments?
When you make mortgage payments every two weeks, you are splitting your monthly payments half. Instead of making one big payment once a month, you make two small payments every two weeks.
This represents an additional payment per year, which can significantly reduce the interest you pay over the life of the loan. “Bi-weekly payments can also align better with your salary so you can more easily match payments to your budgeting process,” says Sprague Gerber.
Pay your mortgage every two weeks or monthly
When most people take out a mortgage, they make a payment on the same day each month. Some people choose to set up automatic payment so they don’t have to remember to make their mortgage payments.
Another option is bi-weekly payments, where you split your monthly payment in half and pay it every two weeks. Since some months are longer than others, you end up making an additional full payment per year.
Bi-weekly payments aren’t as simple as monthly payments, but they can save you a lot of money in interest over the life of the loan.
“Generally, one payment every two weeks would be the ‘regular’ mortgage payment and the other you would have to settle to pay off the pure principal,” says Sprague Gerber. Here’s how the two arrangements compare:
Advantages and disadvantages of paying your mortgage every two weeks
Making payments every two weeks will save you money on interest and help you pay off your house faster. It will also help you build up capital home earlier, which has many advantages.
However, bi-weekly payments mean you will have less money for other household expenses. And the process of setting it up isn’t as simple as making monthly mortgage payments.
You will need to contact your lender to ensure that they will authorize bi-weekly payments and that the additional payment will go towards the principal. You also need to make sure you won’t be charged prepayment penalty to pay off your mortgage sooner.
Here are some pros and cons of bi-weekly mortgage payments:
How it works with an escrow account
Although a bi-weekly payment on your mortgage usually includes home insurance and taxes — known as blocked payment — Sprague Gerber says you can manually enter and make a payment that goes exclusively toward the loan principal instead.
“Even if you have to pay an escrow on top of the payment, you can still get the surcharge money back or have it applied in advance,” she says. “Although it’s best to avoid it in the first place if you can.”
How to set up a bi-weekly mortgage payment
Before making bi-weekly mortgage payments, think about any other outstanding debt you have. If you currently have a balance on a credit card, it’s a good idea to repay that debt first before making additional payments on your mortgage.
Once you’re in a good financial position, you can find out if your lender allows partial mortgage payments. This information is described in the loan conditions that you signed when you initially took out the mortgage loan.
From there, you can contact your lender to set up a mortgage payment every two weeks. Some lenders make this easy and allow you to register on their website.
You want to understand your lender’s bi-weekly payment policy before implementing it. Here are some questions you can ask your lender:
- Will my additional payment be applied to principal only?
- Are there any additional charges I should be aware of?
- Are there prepayment penalties?
- Will making additional payments inflate my escrow cushion?
If your lender accepts bi-weekly payments, it’s a good idea to get this agreement in writing.
The bottom line
Bi-weekly mortgage payments can be a good option for a borrower who wants to save on interest and pay off their loan sooner than expected. You want to make sure your extra payments are applied to the principal and you won’t be hit with a prepayment penalty.
But, adds Sprague Gerber, you should always consider your cash flow and financial situation first. “Can you make those payments, or are there other goals in your life that you’re saving for?”