Writing A Check

Image Source: Getty Images.

A biweekly mortgage payment plan involves paying half of your monthly mortgage payment every two weeks. This results in an extra payment each year, which can accelerate the payoff of your mortgage principal by several years, saving thousands of dollars in interest.

Why pay biweekly instead of monthly?

A biweekly mortgage payment plan means that instead of making 12 monthly payments each year, you pay half of your payment amount every two weeks. Since there are 52 weeks in a year, this translates to 26 half-payments, or 13 full payments.

So, the net effect of a biweekly payment plan is that you make one additional mortgage payment each year, 100% of which is applied to your loan's principal.

There are a few benefits to paying your mortgage this way:

  • You'll build equity in your home faster.
  • You'll pay off your loan sooner
  • You'll pay less interest to the bank over time.
  • If you get paid biweekly, you can coordinate your mortgage payments to automatically draft on payday.

However, it's important to realize that this isn't without its drawbacks. For one thing, you'll be putting more of your paycheck toward your mortgage, which not everyone can afford to do. You also might be asked to pay a fee to set the plan up, which we'll get into later. And, there is a good case to be made that if your interest rate is low (say, 4% or less), you're better off taking that extra money and applying it toward other debts, or investing it.

You may be surprised at the long-term effects

Just how much savings are we talking about here? Well, that depends on a few factors -- specifically your interest rate, loan term, and principal balance.

As an example, let's say that you obtain a 30-year fixed-rate mortgage with a principal balance of $200,000 and an interest rate of 4%. Not only will your one additional payment each year result in $22,553 in interest savings over the life of the loan, but you'll pay off the mortgage more than four years faster.

Here's a calculator that can estimate your savings. Keep in mind that this doesn't consider taxes and insurance as part of your mortgage payment, so if you base your biweekly payment plan on your total payment including these things, the effect will be even more dramatic.

 

* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

Watch out for fees

You may have gotten mailers from third-party companies offering to set you up with a biweekly payment plan for a fee, typically from $200 to $500. While most of these companies are completely legitimate businesses, and this price may seem small compared to the long-term savings, you should be able to do this for free. Some lenders even refer customers to these companies because they don't offer biweekly payment plans in-house.

Many banks and mortgage servicers allow you to set up a biweekly payment plan for free. For example, my first mortgage was through Wells Fargo, and I was able to switch to biweekly payments online in about 30 seconds.

If your lender doesn't offer this for free, a way to get the same effect is to continue making monthly payments, but pay additional principle equal to one-twelfth of your monthly payment. This will produce the exact same long-term effect as a biweekly payment plan.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short October 2016 $50 calls on 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.