There's an easy way to save you several years, as well as thousands of dollars in interest, on your mortgage. By making your payments biweekly instead of monthly, your loan will get paid off more quickly, and less interest will accumulate over the life of the loan.
Here's why a biweekly payment plan works so well and, more importantly, how to do it the right way.
Why it works so well
What a lot of people don't understand is why it makes a difference whether you pay monthly or biweekly. As we all know, there are 12 monthly payments per year on a standard mortgage repayment plan. By cutting those payments in half, and paying every other week, you'll make 26 payments per year (52 weeks in a year), and each one will be half as much as your standard monthly payment.
In other words, you'll pay the equivalent of 13 of your standard monthly payments, or an entire extra monthly payment every year. And, because the extra payment is spread out over the course of a year, you'll barely notice the difference.
You shouldn't have to pay for it
One thing you need to be aware of is the abundance of third-party companies that will send you offers to set up a biweekly payment plan for your mortgage – for a fee. These are companies that obtained your information from your county's public records -- not your lender -- who send you unsolicited offers in the mail.
Generally, these companies charge an enrollment fee, monthly "handling" fee, or both. And the enrollment fee alone is usually in the $300 to $400 range. Plus, the monthly fee can add up to $9 on top of that. It should never cost you money to pay extra on your mortgage.
Under no circumstances should you pay one of these companies to do this for you. Not only is this a completely unnecessary expense to pay, but by enrolling in one of these companies' plans, you're agreeing to do it every two weeks, no matter what.
Instead, do it yourself. Many of the major mortgage servicers, such as Wells Fargo, allow you to automatically set up a debit from your checking account every two weeks.
Even if your mortgage servicer doesn't offer such a feature, a biweekly payment plan isn't too tough to do on your own. Simply set aside half of your monthly payment amount every two weeks. Each time you have a full payment saved up, send it in. Just make sure you specify that you want your 13th payment each year to go toward paying off the principal.
How much can you save?
You might be surprised. Let's take a look at an example.
If we take out a 30-year, $250,000 mortgage at 4% interest, our monthly payment will be $1,194 for principal and interest. So, over the life of the loan, we'll pay $429,840 in total, or $179,840 in interest.
However, on a biweekly payment plan, you'll end up paying an extra payment every year, which pays the principal down faster and reduces the amount of interest that accumulates. This reduces your total payments to about $402,710, or about $27,000 less in interest. Furthermore, you'll pay the loan off nearly five years sooner.
If interest rates rise, the effects of a biweekly payment plan will be even more significant. For example, if mortgage rates jump to 5.5%, the amount of time you cut from your mortgage jumps to more than six years.
You won't even miss it
This is especially true if you get paid on a biweekly schedule at work. Simply make a payment equal to half of your standard monthly payment every time you get paid. You'll never even realize the difference in your cash flow, and it will save you tens of thousands of dollars in interest on your mortgage.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.