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Mortgage loans are designed to be paid off over decades, with borrowers making monthly payments typically for either 15 years or 30 years (depending on the term length you choose when you get your loan).
In some cases, however, you may be interested in paying off your mortgage loan ahead of schedule. Biweekly mortgage payments could potentially help you do that — but should you try out this technique?
Why make biweekly mortgage payments?
Making biweekly mortgage payments would mean you pay your loan every two weeks, instead of making one monthly payment. Essentially, you'd take the amount you owe each month and divide it in half. So if your monthly payment was $2,000, you would make a $1,000 payment every two weeks instead of a single $2,000 payment.
Making biweekly payments can make sense if you are paid every two weeks. Essentially, you would just pay half of your mortgage each time your paycheck is deposited. But you may be wondering why this would actually benefit you. And the reason is simple.
If you make payments every two weeks and there are 52 weeks in a year, you end up making a total of 26 half-payments or 13 full payments. If you pay monthly, then you obviously make only 12 payments. So, by using the biweekly approach, you would make one extra mortgage payment each year.
Making an extra payment allows you to save money on your mortgage over time and pay off your loan faster since your extra payment would go toward reducing your principal balance. This could save you quite a lot of money in the end.
Say, for example, you had a $300,000 principal loan balance, your mortgage interest rate was 4.5%, and you had 18 years left to pay your mortgage loan. If you kept making your monthly mortgage payment of around $2,028.97, you'd pay $138,258.35 in total interest. But if you switched to biweekly payments, you'd end up paying only $120,003.77 in total interest. You'd also pay off your loan several years sooner.
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Why you may not want to make biweekly mortgage payments
Although becoming debt-free sooner and spending less over time on your home loan sounds good, you may not necessarily want to take this approach. There are a few reasons for that.
Many mortgage lenders don't accept biweekly payments — you have to just make one monthly payment. You could still implement this technique by making your payments every two weeks into a savings account, making your normal monthly payment, and then making your 13th extra payment when you have the money. But this is still a bit of a hassle.
The inconvenience of figuring out how to make biweekly payments isn't enough of a reason not to do it — but there is another reason you may want to pass on this plan. The fact is, the money you use to make the extra monthly mortgage payment during the year could potentially be better used elsewhere.
When you pay your mortgage early, your return on investment (ROI) is simply the saved interest. In our above example, this would mean your return on the saved interest was about 4.5% per year for each year you paid off your loan early. But you could have taken that extra $2,028 and invested in the stock market, potentially earning a better return. An S&P 500 index fund is a relatively safe investment that can produce 10% average annual returns over the long run.
In the above example, paying off your loan using biweekly payments would save you $18,254.58. But if you instead invested $2,028 over the year in the market for 18 years and earned 10% average annual returns, you'd end up with $92,480.68. That's quite a bit more money.
While the math points to investing as the better return, the fact is, you need to consider whether you really will invest that extra money. If you're likely to just spend it on things instead, then you'd be better off with the biweekly mortgage payments to become debt-free sooner — especially if you're passionate about making those extra payments because owning your home outright ASAP is a major priority.
Only you can decide how to prioritize your financial goals, but be sure to make your choice with both eyes open.
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