Buying home is an important milestone and likely the biggest purchase you'll ever make. Because it's such a big part of your and your family's life, it's important to know all the options available when it comes to paying back your mortgage.
This article looks at how mortgage payments work, how to pay your mortgage and the pros and cons of monthly versus biweekly mortgage payments.
How do mortgage payments work?
When you take out a mortgage, you‘re borrowing money to buy or refinance a home. You make regular payments to repay this loan, usually monthly. The amount you borrow is the loan principal.
With each payment you make, you'll be paying off part of the principal amount and part of the interest. The interest is what the lender charges for loaning you money to buy a house.
Depending on the type of mortgage you have, your payments are usually consistent in amount and made monthly. In the beginning, the majority of your payments will be used to pay off the interest on your loan. As this amount reduces, more and more of your payments will start applying to the principal — the actual amount you borrowed. This means that for the first few years of your loan, your payments are focused on paying off interest rather than principal.
If you apply additional payments to your principal to bring the amount down, the interest paid on the balance goes down as well because interest is calculated based on the principal balance. The goal for anyone looking to make additional payments on their mortgage should be paying down as much of the principal as possible.
Monthly mortgage payments
When most people buy homes using mortgage loans, they make monthly payments. This once-a-month option is common, and it's convenient as these payments are made on the same day each month. This makes it easy to keep track of your payment due date.
For even more convenience, many opt for automatic mortgage payments. These make it easy to pay on time and require minimal effort.
Monthly payments make budgeting simple, but it's not always the best choice when it comes to paying down your mortgage faster. Compared to biweekly payments, you'll pay more interest over the life of your home loan. This is true regardless of whether your mortgage rate is low, fixed or adjustable. While making 12 payments per year may be simpler, you may pay more for your house than you have to.
Biweekly mortgage payments
There is an alternative to monthly payments — making half your monthly payment every two weeks. When you make biweekly payments, you could save more money on interest and pay your mortgage down faster than you would by making payments once a month.
When you decide to make biweekly payments instead of monthly payments, you’re using the yearly calendar to your benefit. By making payments every two weeks, you'll make 26 payments per year instead of 12. While each payment is equal to half the monthly amount, you end up paying an extra month per year with this method.
For example, if you pay $1,200 once per month as your entire monthly mortgage payment, you're currently making monthly mortgage payments of $14,400 per year.
When you change to biweekly payments, you'll make payments every two weeks. If you used to pay $1,200 dollars a month, you'll pay $600 every two weeks instead. Because some months are longer than others, you'll end up making an extra mortgage payment each year. That equals 13 monthly payments annually, totaling $15,600.
With an extra payment each year, you can pay your principal down faster than you would with the monthly payment strategy. While you'll be making an extra payment, you likely won’t feel a negative financial impact because the payments will be spread throughout the whole year. While one extra payment every year may not seem like a big deal, when you consider the full mortgage loan term, it has its benefits.
Bonus biweekly benefit
If you're paid weekly or every two weeks, another bonus of choosing biweekly payments is that you'll be paying along with your paycheck. Biweekly mortgage payments can help keep you on track, financially speaking. They can also assist you with sticking to a budget that makes it easier to pay your mortgage down faster.
To see if this option would benefit you, use our extra payments calculator. This will show you how much you could save on interest over the life of your mortgage loan. Simply enter your loan information and see if biweekly payments are a good choice for you. If you've asked yourself, "How do I lower my mortgage payments over the long term," biweekly payments may be the answer.
Drawbacks to biweekly payments
One drawback to biweekly mortgage payments is that some lenders may charge fees to enroll in their biweekly payment plan. When it comes to fees, you should crunch the numbers to confirm you'll still get ahead financially by paying biweekly.
Another factor worth noting is that biweekly payments won't enhance your credit score. While they won't negatively affect your score, the credit bureaus use 30-day time frames when they analyze credit data to set ratings. Therefore, you'll make out the same, credit rating-wise, with monthly or biweekly payments.
How to change to biweekly mortgage payments
Some lenders have to grant permission before you can begin making payments twice a month instead of once. If you get permission, ask your lender to start crediting each half monthly payment right away. If your lender waits until a second payment is received before applying the payment, you won't benefit as much from switching to a biweekly payment plan.
Some lenders charge fees to change payment agreements, while others do not. When you talk to your lender, find out if fees are associated with making the switch.
If your lender does not agree to the biweekly payment terms that you propose, simply pay extra every month to get the same benefits. You can also save up and make an extra payment every year, rather than every month. When you make any kind of extra mortgage payment, make sure it's being applied to your loan principal rather than the interest.
It’s important to note that certain mortgages don't permit early payoffs. When early payoffs aren't allowed, lenders may charge fees known as prepayment penalties. These fees may equal the amount of interest you’re eliminating. If you aren't sure if your mortgage allows early payoffs, look over your contract or talk to your lender.
Which payment option is right for me?
Some homeowners who switch to biweekly payments save a significant amount on the cost of their mortgage loans while others don't save that much. How this type of payment schedule will work out depends on a variety of factors, including the terms of your mortgage loan and fees for switching to biweekly payments.
When you’re ready to talk about mortgage payment options and how they might be able to help you reduce the amount of interest you pay over the life of your loan, connect with our team of home lending advisors.