Bi-weekly Versus Monthly Mortgage Payments

Pros and Cons about Paying Your Mortgage Every Other Week vs Paying Just Once a Month

By

Matt Lyons

on

Jan 21, 2021

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Mortgage payments are one of the main factors to consider when purchasing a home, since you will have to make payments over time to completely repay the loan. Along with these regular payments on the loan amount, you’ll also be paying off the interest of the loan. The most common types of mortgage payments are made monthly, where you will start by paying the most towards that interest. As your interest amount decreases, you will start paying more towards the loan principal, which is the amount you had initially borrowed. 

5 most common types of mortgage loans include:

  • Conventional loan: Best for borrowers with a good credit score.
  • Jumbo loan: Best for borrowers with excellent credit who are looking to buy a home.
  • Government-insured loan: Best for borrowers who have lower credit scores and a limited amount of cash for a down payment.
  • Fixed-rate mortgage: Best for borrowers who prefer a set monthly payment over the course of the loan.
  • Adjustable-rate mortgage: Best for borrowers who aren’t planning to stay in the home for a sufficient amount of time. Those best for this type of mortgage typically prefer lower payments in the short-term and are alright with having to pay more in the future.

Monthly Mortgage Payments 

Most people who use mortgage loans make payments once a month. These payments are due on the same day every month, so you’ll always be able to plan in advance and save up if need be. While monthly payments seem most reasonable and efficient, you might actually end up paying more for those 12 payments of the year. This is due to the increase of interest. 

Because you know the exact date of the mortgage payment each month, you can opt for automatic mortgage payments to automatically withdraw when it is due. However, automatic payments can run you into trouble when you don’t have the money in your account. This could leave you with overdraft/penalty fees from your bank and lender.

Bi-Weekly Mortgage Payments 

While monthly mortgage payments are the most common, you can also opt to make your monthly payment every two weeks instead. Instead of making 12 payments every year, you’ll be making around 26 payments with a bi-weekly schedule. Some months are longer than others, so technically you’re paying more with bi-weekly payments. Why is this a good thing? When you make extra payments, you’re working to pay the principal down faster. Looking at the entire term of your loan, making extra payments could definitely provide some benefits down the road!

Cons of Bi-Weekly Mortgage Payments 

While bi-weekly mortgage payments can be a good idea to help you pay down that principal faster, there are some drawbacks that you will want to consider.

Taking Away from Other Savings Goals

Mortgage payments can make up a pretty large amount of your total bills each month, and with a bi-weekly strategy you are paying more overall towards that payment. Putting even more money towards the mortgage can impact other goals you might have, including saving up for a retirement or a new car. 

Prepayment Penalty Fees

Some lenders will charge you a fee to enroll in a bi-weekly payment plan. There are payment processing companies out there that won’t hesitate to charge an initial set up fee, which could be as high as $300! Many mortgages also come with a prepayment penalty, that lenders might charge if the borrower paid off the loan before the repayment schedule had originally stated. Prepayment penalties can include a 2 to 4 percent charge of the balance/flat fee. Make sure to look over all your documents and speak with a servicer to verify the payment plan. 

Permanent Agreement

When you sign up for bi-weekly mortgages, you are making a commitment to every single one of those payments. Most bi-weekly plans are permanent agreements, where you can not switch between monthly and bi-weekly. If you don’t feel confident that you will absolutely be able to make the payments, don’t sign up for the plan! As mentioned previously, look over all the documents given to you and speak with the lender about anything you might still feel unsure about. 

Setting up a Bi-Weekly Mortgage Plan

If you’re interested in potentially switching to a bi-weekly mortgage payment plan, contact the company that currently is in service of your mortgage loan. If your lender allows for bi-weekly payments, you’ll now be able to break up the one time monthly amount in half. If you are approved for the bi-weekly payments, there are some important things to note when starting off. Your bi-weekly payments won’t be added to your account until you’ve reached your full monthly payment amount, and you might have to pay the two half payments on top of the regular monthly payment during the first month. 

In the case where your lender might not offer a bi-weekly payment plan, you can always just put in a little bit extra towards those monthly payments to reap some of the same benefits. Any extra mortgage payments should be added for the loan principal, not the interest. 

Main takeaways to consider before confirming a bi-weekly payment plan:

  • Check with your lender to learn about a bi-weekly payment plan if available.
  • Make sure the additional payments you make go towards the principal, not interest. 
  • Look out for any prepayment penalties or additional fees. 

Which Option is Best for Me?

Before taking on a bi-weekly mortgage payment plan, ensure you have the cash available to make those extra payments. What debts do you have? What does your savings account look like? If you are qualified, you might end up paying your mortgage a lot sooner than you thought originally! Good luck!

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