A bi-weekly schedule is probably a mortgage option you haven't considered, yet it can be financially rewarding in the long run. Most borrowers submit a mortgage payment to their bank on the first of every month, or within the 15-day grace period. Therefore, you may only think about your mortgage once month—on your due date and not a day sooner. But if you want to pay down your mortgage balance as soon as possible without committing to a 15-year or a 20-year mortgage term, a bi-weekly payment plan might be the solution.
A bi-weekly mortgage isn't anything new. But like so many homebuyers, you may not realize it’s an option. With this payment schedule, you submit a mortgage payment every two weeks rather than once a month. You'll basically split your mortgage payment in half, and then pay one half every two weeks. Since there are 52 weeks in a year, you end up submitting 26 half payments a year, or 13 monthly payments. This results in one extra mortgage payment every year. Making one additional mortgage payment might seem like a drop in the bucket, but this extra payment makes a big difference over the course of your mortgage term.
1. Reduce Your Principal Balance Sooner
A bi-weekly mortgage payment plan has the power to significantly lower your principal balance years sooner. This extra payment is applied to your principal, not the interest. The more you pay toward your principal, the faster you can get rid of the mortgage. Typically, a bi-weekly mortgage can knock as much as six to eight years off a mortgage term. And since you're decreasing your principal faster, a bi-weekly plan can dramatically reduce how much you pay in interest over the life of your loan.
2. Build Equity Faster
Increasing your home’s equity is a combination of two factors: home appreciation and paying down the mortgage loan. The truth is, it can take years to build substantial home equity. And unfortunately, if your local housing market spirals downward, you can lose some or all your equity. However, paying off your mortgage sooner can soften the blow and protect some of your equity. You can avoid an upside-down mortgage loan, and you might still profit from a sale.
Since a bi-weekly mortgage reduces your balance and pays off the property sooner, this schedule helps you build equity faster. This is also good news if you’re paying private mortgage insurance, which is required on home without a 20 percent down payment. Typically, mortgage lenders remove PMI once a property has at least 20 percent equity.
3. Automate Monthly Payments
If your mortgage company doesn’t accept partial payments, you might wonder how a bi-weekly plan is possible. With this type of schedule, you may have to submit payments through a third-party company that partners with your lender. This company will debit your bank account every two weeks and place these funds in a trust account. Funds are taken from this account and paid to your lender monthly. The entire process is automated, so you don't have to worry about accidentally forgetting to send a payment to your lender, which can result in a late fee and credit damage.
Because you're making a half payment every two weeks, you'll eventually accumulate more funds in the trust account than what you owe the lender. The company handling your bi-weekly payments sends the extra funds (which is the equivalent of one extra payment a year) to your mortgage lender.
Is a Bi-Weekly Payment Right for You?
Although a bi-weekly mortgage helps pay off your mortgage sooner and builds equity faster, only agree to this schedule if you’re committed to making a mortgage payment every two weeks. There’s a fee to set up bi-weekly payments. After setting up this schedule, you have to stick with the plan.
If you want the benefits of a bi-weekly mortgage but not the commitment, you can achieve the same results by making one extra principal payment every year on your own. You can send this full payment directly to your lender at any time. Just make sure you indicate on the check that you’re making a principal-only payment.
Another option is dividing your mortgage payment by 1/12 and increasing each monthly payment by this amount. If you’re scheduled to pay $1,200 a month, increase the monthly payment to $1,300 a month. You’ll make a normal $1,200 payment to cover the principal, interest, taxes and insurance, and then an additional $100 "principal-only" payment.