Summary

When you buy a home with a mortgage, the default payment schedule is monthly. However, some homeowners opt for biweekly payments to save on interest and pay off their loan faster. By making the equivalent of one extra monthly payment per year, biweekly payments can significantly reduce the loan term and total interest paid. However, it’s important to carefully consider how these payments are handled, especially when involving third-party services.

🏠 Why switch to biweekly payments?

Most homeowners make 12 monthly mortgage payments per year. Switching to biweekly payments involves paying half your monthly mortgage amount every two weeks, which results in 26 biweekly payments — equivalent to 13 full monthly payments annually. This one extra payment can lead to significant savings in interest and a faster loan payoff.

For example, on a $250,000 mortgage with a 4% interest rate, biweekly payments could save nearly $30,000 in interest and shorten the loan by five years. Even if you plan to stay in your home for only seven years, you could still save thousands in interest and pay off more of the loan principal, positioning yourself for a larger down payment on your next home.

Takeaways:

• Biweekly payments equal 26 payments per year, or 13 full monthly payments.

• Homeowners can save thousands in interest and reduce loan terms significantly.

• Even short-term savings can boost equity and improve future financial opportunities.

Key Terms

• Biweekly Payments: A payment schedule where half of your monthly mortgage payment is made every two weeks, totaling 13 full payments annually.

• Principal: The original loan amount you borrowed, excluding interest.

• Interest: The cost of borrowing money, typically expressed as a percentage of the loan amount.

• Prepayment Penalty: A fee some lenders charge for paying off your loan early.

⚠️ Beware of payment processing companies

Not all lenders offer biweekly payment options, leading some homeowners to turn to third-party payment processing companies. These companies may promise to manage your biweekly payments but often charge setup fees, which can be as high as $300, along with ongoing monthly fees. Additionally, they may not actually process your payments biweekly. Instead, they might hold onto your second payment until the monthly due date, eliminating the benefit of the extra annual payment.

If you’re considering one of these services, proceed with caution. Verify their payment practices to ensure you’re getting the promised benefits and evaluate whether their fees outweigh any potential savings. Many homeowners find it’s easier — and free — to manage the biweekly payment process themselves.

Takeaways:

• Third-party payment processors may charge significant fees for biweekly plans.

• Some companies may negate savings by holding payments until the monthly due date.

• Carefully vet any payment processor to ensure you receive the benefits you expect.

Key Terms

• Payment Processor: A third-party company that manages payment schedules, often for a fee.

• Setup Fee: A one-time charge for initiating a payment service.

• Contract: A binding agreement that may limit your ability to cancel payment services easily.

🛠️ How to do it yourself

If your lender doesn’t offer a biweekly payment option, you can achieve the same results on your own. Start by dividing your monthly mortgage payment by 12 and adding that amount as an extra principal-only payment each month. Alternatively, save that extra amount in a separate account and make one lump-sum payment at the end of the year. This approach mimics the impact of biweekly payments without involving third-party services.

Before proceeding, confirm that your lender does not charge prepayment penalties and that any additional payments are applied to the principal balance only. By managing your extra payments yourself, you can avoid unnecessary fees and ensure the full benefit of reducing your loan term and interest costs.

Takeaways:

• Homeowners can create their own biweekly payment schedule without third-party help.

• Divide your monthly payment by 12 and apply that amount as an extra principal payment monthly.

• Confirm with your lender that extra payments are applied directly to the loan principal.

Key Terms

• Principal-Only Payment: An additional payment applied entirely to reduce the loan principal.

• Lump-Sum Payment: A single large payment made to reduce your mortgage balance.

• Prepayment Strategy: A method for paying off a loan faster than the scheduled timeline.

Conclusion

Switching to biweekly mortgage payments can be a smart financial move that saves you thousands in interest and shortens your loan term. While third-party payment services might seem convenient, they often come with fees and complications. By creating your own payment schedule and ensuring your extra payments target the loan principal, you can achieve the same benefits for free. If your finances allow, adopting a biweekly payment plan — whether formally or informally — is a powerful tool to accelerate your journey to mortgage freedom.