With interest rates in the 6-7%+ range, mortgages became a lot more expensive in 2023 compared to just a few years ago. Paying a mortgage every month can seem like a never ending story. For most people, 30 years of payments is standard – that’s 360 monthly payments. However, there’s a simple way to shorten that loan by years by implementing a different payment schedule: a bi-weekly one.

Bi-weekly, bi-monthly, monthly, what’s the difference?

The traditional way to pay most bills is once a month. We’re all familiar with credit card, vehicle, and utility payments being once a month. Mortgages in most cases assume equal monthly payments as part of the payment plan. This is the most traditional way mortgages in the United States are set up.

A bi-weekly payment takes that traditional monthly payment amount and cuts it in half and it pays that half every other week. A bi-monthly payment is paying half your mortgage payment amount twice a month. These two things are not the same.

On a bi-weekly payment plan a total of 26 payments will be made. If you make a payment every other week, you’ll end up making 26 payments, or 13 monthly payments, in one year. You’ll basically be paying an “extra” month of mortgage payments every year. Some banks even apply the half payments right away, reducing the amount of interest you’ll pay even further.

In a bi-monthly payment, a total of 24 payments a year are made. No extra money is going towards principal and few lenders apply half payments until the entire amount is received, so making these payments may not result in any interest or time savings. It’s not just semantics; it’s very different with different results.

Bi-weekly benefits

When you implement a bi-weekly payment you’ll make 26 payments a year. That means an entire month’s worth of payment will go straight towards reducing your principal. That’s not the case in a bi-monthly payment schedule.

A bi-weekly payment schedule is not the norm and can be really beneficial. It can save you tens of thousands in interest and years of payments. Instead of paying your mortgage once a month, if you pay your mortgage every other week from the start, you can reduce your mortgage by years. Implementing a biweekly payment plan on a $400,000, 30 year fixed rate mortgage at 6% interest could save $96,000 in interest payments.

As you make these extra payments, the equity in the home will build. This means other magical things can happen. Things like mortgage insurance, i.e. PMI, can drop off sooner (unless you have an FHA loan). PMI will drop off once there is 20% equity in the property. Once you get rid of PMI, you can send your pay off strategy into hyperdrive by applying what you used to pay in PMI to the principal every month instead.

How to get this setup

Check with your mortgage holder about whether they accept bi-weekly payments. Not all do. For example, US Bank doesn’t, but they do allow you to make additional payments towards principal. Rocket Mortgage and Chase Bank do allow for bi-weekly payments, but you have to follow a process and select the right payment option. Be sure that when you request bi-weekly payments all extra payments apply toward principal and not interest or escrow.

Silly fees

Some mortgage companies or processing companies may charge a processing fee or setup fee for bi-weekly payments. Our lender doesn’t. But if your mortgage company does, work through the costs to see if it still makes sense to do a bi-weekly payment. If implementing a bi-weekly payment will save thousands of dollars over time, it might be worthwhile to spend an extra couple of dollars to do a bi-weekly payment. However, if the fees are high, consider just making an extra payment every month, quarter or at the end of/beginning of the year.

If your mortgage company allows for bi-weekly payments, it should be pretty straight forward to setup.

Should I setup bi-weekly payments if I have a low interest rate on my loan?

Mr. Moneyaire and I have opted to do bi-weekly payments towards our 15 year mortgage with a 2.875% interest rate. Mr. Moneyaire and I have different takes on loan repayment; Mr. Moneyaire would like to pay off our mortgage sooner rather than later. Instead of actively making extra additional payments, we find making bi-weekly payments works for us for two reasons. First, we’ve setup automatic payments and there’s no ongoing active decisions to make. If we had to discuss and agree to make an extra payment every year, I’m not sure we’d always agree or do it. Second, the extra payments are barely noticeable to us. I would of course appreciate the extra money to put towards investments. However, Mr. Moneyaire sleeps better at night knowing our mortgage is being paid off faster than anticipated.

If you have an interest rate at 4% or higher, certainly check into bi-weekly payments. The higher your interest rate the better off you are getting that mortgage paid off fast. If you have an interest rate below 4%, it’s really what your preference is. I personally would rather invest that money on a low interest rate, but my partner would rather be debt free sooner, and that’s okay by me.

What’s the Catch?

Although Mr. Moneyaire and I don’t feel the pinch of making an extra payment every year, others might. Most months you’ll make two payments towards the loan, but there will be some months where you’ll pay three times. If you’re living paycheck to paycheck, getting hit with that extra half payment can be disastrous if you aren’t prepared. If there are extra fees associated with paying bi-weekly, it can really eat in to the savings you’re trying to realize. Also, a lot of mortgage companies don’t apply the half balance until the full amount is paid. If this is the case, the principal won’t go down as fast as it would if the payment applied right away. Take all these factors into consideration if you’re thinking about doing bi-weekly payments.

When’s the best time to have bi-weekly payments setup?

The sooner you have this payment method set up the faster you’ll reach that payoff date and the more money you’ll save. Check out this mortgage calculator that will show you how much in interest and time you can save if you start implementing bi-weekly payments to your mortgage. Good luck, and a speedy payoff date.

Cheers!

Mrs. Moneyaire