When financing a house, one of the many decisions a homeowner must make is how to schedule their mortgage payments. By default, payments are due once a month. However, some savvy borrowers choose to make biweekly payments instead in an effort to pay off their mortgages faster resulting in less interest paid over the lifetime of the mortgage loan.
How do biweekly payments work?
When paying a mortgage monthly, this comes out to 12 mortgage payments per year. Biweekly payments, however, allow a homeowner to make half the monthly amount once every two weeks. With 52 weeks in a year, this works out to 26 biweekly payments, or 13 monthly payments. If the homeowner opts to make these 13 payments a year, they will pay less in total interest while simultaneously lowering the principal balance at a much quicker pace.
How does this affect interest?
Interest on mortgage loans is calculated on a monthly basis. In other words, the lower the principal balance, the lower the interest. In paying biweekly, the principal balance is reduced just prior to the monthly interest being calculated. While it may not be reduced by much at first, the small savings add up. For example, with a 30-year fixed loan of $250,000 at a 4% interest rate, a biweekly repayment timeline would save a borrower nearly $30,000 in interest charges.
How much faster will the loan be paid off?
Using the same example from above, a 30-year fixed loan of $250,000 at a 4% interest rate, a biweekly repayment timeline would have the loan paid off midway through year 25. This means five fewer years of mortgage payments!
Biweekly payments also make it easier to budget; it essentially divides one extra mortgage payment by 26, spreading it out over the course of a year. While this does require a slightly adjusted monthly budget, the schedule allows for more contribution to mortgage principal every year, while also steering away from one large sum of money being taken out at one time through default monthly payments.
If you have any questions about biweekly payments or how you can set them up for your mortgage loan, please reach out to us at (760) 930-0569 and one of our loan officers will be happy to help answer your questions.