If you are a homeowner with a conventional mortgage who makes monthly payments on your home, you may have heard about biweekly mortgage payment programs as an alternative to traditional payment plans.
The way to do this, according to some lenders, is by paying biweekly mortgage payments versus monthly payments. The conventional logic is that increasing the frequency of the payments doesn't allow interest to build up and over the course of a 30- or 15-year mortgage that can equal years eliminated from your loan.
Before you sign up for these biweekly payments, it may be wise to examine if this logic is actually true and will save you money.
Building Better Credit
Some people believe that making biweekly payments improves their credit, but this is no more than a myth, according to experts. Using a biweekly payment schedule set up by your mortgage lender puts you on an automatic withdrawal plan that assures that your payments are made on time.
Some mortgage companies may not accept biweekly payments on mortgages, so you should ask ahead of time before signing up for a biweekly payment plan via a third-party lender.
If you're the type of person who misses payments from time to time because you forgot to write the check, an automatic payment schedule will improve your credit because of the on-time payments, but you can get the same advantage with an automatic monthly payment too.
Is Making Biweekly Mortgage Payments A Good Idea?
Does It Remove Interest From Your Loan?
This may be a myth. Why? Because depending on the particulars of your loan, there is a good chance that the company receiving your mortgage payment isn't the company that holds the loan.
Although you're paying twice per month, the servicer receiving your payment isn't making biweekly payments to the company that owns your loan. And they're likely holding it in an account until the end of the month.
- Many biweekly payment programs offered by lenders are not necessarily the best financial choice for homeowners.
- Committing to biweekly mortgage payments may not be affordable on a tight budget.
- Biweekly mortgage payments may not necessarily improve your credit score.
- Making additional payments towards the principal of your mortgage is another way to reduce your interest payments over the life of the loan.
But does this mean that the interest that is building up isn't reduced? Remember that each calendar year has 52 weeks, and if each month has four weeks that equals 48 weeks. This means that biweekly payments won't consist of two payments each month but instead, 26 half payments—the equivalent of 13 monthly payments in a year.
How the Math Works
If the math is a little tough to follow, it works like this: Biweekly payments are equal to 13 monthly payments in a year where making traditional monthly payments are equal to 12 payments each year.
By paying an extra month, you're paying extra principal which shaves six to eight years off the life of the loan over time.
But do you have to make biweekly payments to do that? You could divide the amount of one month's payment by 12 and add that amount to your monthly mortgage payment.
If you're paying $1,500 per month, divide 1,500 by 12 and make your monthly payment $1625. Talk to your mortgage company first to make sure there isn't something more you have to do to make sure it is applied to the principal amount of your loan.
Research Options Before You Sign a Contract
There are two potential problems with going with a lender's biweekly payment program.
First, the reason they want to sign you up for this type of plan is that there are often fees attached to it, and that equals revenue for the lender. They are charging you to give them a two-week loan.
Second, most consumers already have enough contractual payment obligations in their life. Especially for those without a lot of financial reserves, it may be better to keep some flexibility in your budgeting rather than committing to the biweekly payments.
You can always make extra payments when you get three paychecks in a month, receive a tax refund or come into unexpected money.
The Bottom Line
If you are considering a biweekly payment program to lower your mortgage, it may be wise to investigate whether a bank or mortgage service provider's sponsored plan works for your budget.
There are ways to pay down mortgages without signing up for a plan that may come with fees attached to it. The benefits may not outweigh the gains of a biweekly mortgage.