What Is a Biweekly Mortgage?
A biweekly mortgage is a mortgage product that allows the borrower to make payments every two weeks rather than once a month. A biweekly mortgage means that the borrower is paying every two weeks, or 26 half payments. The result is effectively 13 full payments over a 12-month period, accelerating the payoff of the loan.
The extra payment per year can provide significant savings in total interest over the life of the loan. However, borrowers should consider carefully before signing up for a biweekly mortgage since there can be some disadvantages to these types of payment plans.
- A biweekly mortgage is a home loan that is repaid on a payment schedule occurring every other week. equaling 26 half payments or 13 full payment equivalents in a year.
- A biweekly mortgage helps reduce borrowers' overall interest costs, and the extra payment per year can help the borrower pay off the mortgage sooner and save in total interest over the life of the loan.
- Most lenders require borrowers commit to the biweekly schedule once they begin it, meaning that sufficient cash must be on hand throughout the month and not only at the month's end.
How a Biweekly Mortgage Works
A biweekly mortgage allows the borrower to make the equivalent of one extra month’s mortgage payment over the course of a year. For example, if a borrower's monthly mortgage payment is $1,200 per month, the biweekly mortgage equivalent would result in two payments of $600 every two weeks from the borrower. Although paying 26 half payments can lead to paying off the mortgage sooner, there are some advantages and disadvantages, particularly with how the payments are applied by the mortgage servicing company.
Advantages and Disadvantages or Biweekly Mortgages
Borrowers should consider all of the benefits and drawbacks of biweekly mortgages and check with the bank or mortgage company to be sure they offer biweekly mortgages.
Advantages of Biweekly Mortgages
Borrowers can pay off the mortgage sooner by making one extra payment per year. For example, let's say a borrower has a $200,000 mortgage with a rate of 5% and a 30-year term. If the borrower does the biweekly mortgage, the loan would be paid off in 25 years or five years earlier versus the traditional mortgage with monthly payments. The extra payment per year adds up over time and allows the borrower to own the home sooner.
The interest saved as a result of a biweekly mortgage is also a significant benefit. Using the financial details from the above example, the total interest for the traditional mortgage would be $187,000, while the biweekly mortgage would cost $151,000 over the life of the loan. Not only does a biweekly mortgage pay off the mortgage sooner, but it also saves the borrower $36,000 in interest over the life of the loan.
Another advantage of a biweekly mortgage versus a traditional mortgage loan is that equity is built up sooner. Home equity represents the portion of the home that the borrower owns. For example, let's say a home has a market value of $200,000, and the borrower has paid off $80,000 of the $200,000 mortgage. The equity in the house would be $80,000, which the borrower could borrow from to make improvements to the home or use the funds for other purposes. In short, a biweekly mortgage helps homeowners build equity faster.
Disadvantages of Biweekly Mortgages
Some mortgage companies hold the first payment of each month and wait until they receive the second payment before sending both payments to the lender, thus somewhat negating the advantage of a biweekly mortgage arrangement. In other words, the payments might not be applied every two weeks to the loan. However, the biweekly mortgage (sent in monthly) would still help the borrower pay one extra payment per calendar year.
Some lenders and mortgage companies charge a fee to establish a biweekly mortgage to help make up for the lost interest due to the borrower paying the loan off earlier.
Also, a biweekly mortgage is a firm commitment to make a payment every two weeks. It typically cannot be changed from month to month. As a result, borrowers need to determine whether they can commit to the additional payments and consider how often they're paid by their employers as well as their other monthly bills.
Biweekly Mortgage vs. Bimonthly Mortgage
A biweekly mortgage is not the same thing as a bimonthly mortgage. The bimonthly structure requires two payments per month, which comes out to 24 payments per year. Since a biweekly payment plan does not adhere strictly to a monthly calendar, it involves 26 payments per year. The two extra payments per year due to the biweekly mortgage are better than the bi-monthly mortgage if the goal is to save interest and pay off the loan sooner.
Creating Your Own Biweekly Mortgage
A disciplined borrower looking to enjoy the benefits of a biweekly mortgage without the added fees can structure their own payments to mimic the plan. The borrower can make payments every two weeks, and if the mortgage company applies the payments immediately, the borrower gets the interest savings. The borrower can also divide their monthly mortgage payment by 12, and set that amount aside each month for a year. At the end of the year, they can take the total amount saved and make an extra payment to further reap the benefits of the biweekly mortgage.
Under a traditional mortgage, each monthly payment is composed of some interest and some principal. Early in the loan, payments are largely comprised of interest, but the principal portion amount increases over the life of the loan. All along, interest calculations are based on the assumption of 12 monthly payments per year. When a borrower sends in an additional 13th payment, most lenders will devote the entire payment to the principal, hastening the payoff horizon of the loan.