5 reasons you should be making bi-weekly mortgage payments

Maybe you’ve heard whispers among friends and family that making biweekly mortgage payments — once every two weeks instead of once a month — can help you pay off your loan sooner. That’s true in most cases, but did you know that there are a ton of other benefits as well? 

If you’re intrigued, stay tuned. We’ll show you exactly how to make biweekly payments work for you, as well as their benefits.

If you’re like most people and fork mortgage payments over once a month, you’ll make 12 full mortgage payments in a year. 

But what if you make biweekly payments? In that case, either you or your lender will split your payments in half and submit a payment twice a month. For example, if you normally make a $1,000 monthly mortgage payment, you’ll instead make a $500 mortgage payment every two weeks. 

This leads to a calendar quirk that lets you get ahead. There aren’t a uniform number of days in each month, and so by making biweekly mortgage payments, you’ll make 26 “half-payments,” or 13 “full” payments per year instead of the normal 12 payments. In other words, you make one extra full payment per year, and you won’t even feel it because you’ve budgeted for it. 

This extra payment might not seem like much, but over the course of the loan, it has huge effects. 

Let’s look at an example. Say you just bought a house and have a $200,000 mortgage with a 30-year loan term and 4.125% APR. Here’s what will happen if you stick to the plain-Jane monthly mortgage plan versus biweekly payments:

In this example, making biweekly payments allows you to pay off your mortgage a full four years and two months earlier. It also saves you $19,080.68 to boot. 

There is one caveat: Some lenders will charge you to make biweekly payments, since it’s essentially twice as much work for them to process. If your lender does this, it may be better to stick with your normal monthly payment plan. If you want to make biweekly payments, you can still do so manually for free by setting aside a portion of your paycheck on your own, paying your normal monthly payment, and then submitting an extra payment yourself once per year.

1. Build equity faster

Home equity is the amount of your home that you actually own versus how much you owe your mortgage lender. For example, if your home is worth $200,000 and you still owe $150,000 on your mortgage, you have $50,000 worth of home equity. 

One of the biggest benefits of making biweekly mortgage payments is that you build home equity faster. You may not realize it, but when you are in the early years of being a mortgage borrower, the vast majority of your mortgage payment goes toward interest — not the principal balance on your loan. Additionally, until you are significantly chipping away at that principal loan balance, you aren’t actually gaining equity (unless, of course, the value of the home increases enough to eclipse your mortgage loan balance). 

When you make biweekly payments and manage to squeeze in that extra payment each year, you’ll be making extra payments toward reducing the balance of your loan. That extra payment will give you a small push toward building equity. 

There are a lot of advantages to having as much home equity as possible. If you have enough home equity, you can take out a home equity loan to finance things like home repairs or remodels.

Another example where having more home equity can help you is when you sell your house. Many homeowners are surprised at how expensive it can be when they go to sell their home. This is thanks in no small part to closing costs, which can amount to tens of thousands of dollars on top of your original loan. 

That’s a big problem if you don’t have enough equity built up in your home to cover the cost. You might end up actually having to pay to sell your home, and lose your down payment money for your next home in the process. One of the best ways to guard against this is to build up as much home equity as you can as fast as you can, and making biweekly mortgage payments is a good way to do that.

2. Pay less interest over time

When you make a mortgage payment, the bank actually splits up up the money and divvies it up in various ways. During the first few years after you take out your mortgage, most of the money will be going toward interest, and very little will be going to reducing the balance of your loan (sadly). This process is called amortization, and anyone who’s ever had a loan literally had to pay their dues, especially during those first few years.

But, again, here’s where making biweekly mortgage payments can really help you. Since you’ll be making an extra payment each year, you’ll pay down the principal even faster. This means that each interest payment thereafter will be smaller than if you hadn’t made that extra payment.

This can save you a huge amount of money over the course of your loan. For example, if you have a $400,000 mortgage, making biweekly mortgage payments can save you over $38,000 in interest.

3. Pay off your mortgage faster

If you make biweekly payments, you’ll be chipping away at your principal balance faster than normal. We won’t lie — it’ll still seem like you’re paying off the mortgage at a glacial pace, but you’ll have a slightly sharper pick than your neighbor. 

If you have a $300,000 mortgage and you’re making biweekly mortgage payments, you can actually shave four years and two months off of your loan. Instead of being in debt for 30 years, you’ll only be in debt for 25 years and 10 months! What would you do with those extra years of being debt-free?

4. Drop your PMI payment sooner

In 2017, the average home buyer bought their home with a 10% down payment. That’s not bad, but for most conventional loans (not including FHA, VA and USDA loans), you’ll need a down payment of at least 20% to avoid paying for private mortgage insurance each month. This fee, which is tacked onto your monthly mortgage payment, protects your lender in case you default on your loan. In other words, it doesn’t even protect you — it protects your lender in case you mess up. 

Once you reach 20% equity in your home, you can ask your conventional lender to cancel your PMI payments. If you make biweekly payments, you can actually get there a lot faster because you’ll be paying down the balance of your loan quicker than normal. 

For example, if you have a $350,000 mortgage and only put 10% down like most people, you’d owe an extra $164.06 each month to pay for PMI. If you make biweekly payments, you’ll hit 20% equity 13 months sooner than if you were making monthly mortgage payments. That’ll save you an extra $2,132.78 in PMI charges.

5. It’s easier to budget

You know that the beginning of the month sucks when you’re trying to scrounge up a massive housing payment. Even if you’re a budget master and on top of your finances, saying goodbye to so much cash at once hurts. 

If nothing else, biweekly mortgage payments take the stress out of those big payments. If you’re paid biweekly, it’s even easier — just send in the check each time you get paid, if that’s the due date that you agree on with your lender. 

That way, the money won’t be sitting in your account until next month, just begging to be spent on something else and leaving you short of the bill when your monthly mortgage payment does come due. Making biweekly payments in this way can save you a ton of stress, in addition to all the financial benefits.

Closing

By default, almost everyone is put on a monthly repayment plan. It’s how we’re conditioned to think about debt: after all, just about every type of loan is paid back on a monthly basis: Credit cards, student loans, auto loans and personal loans. In some cases, like student loans, you may be able to switch to a biweekly payment plan, but it’s not very common. 

That doesn’t mean you need to stick with the mold, though. We’ve shown five great benefits to switching over to a biweekly mortgage payment plan. You’ll:

• Build equity faster 
• Pay less interest over time 
• Pay off your mortgage faster 
• Drop your PMI payment sooner 
• Budget for housing more easily

If you’re interested in switching to a biweekly mortgage payment plan, the next step is to contact your lender to ask about it. Your future self will thank you.

This article originally appeared on MagnifyMoney.com and was syndicated by MediaFeed.org.