Many homeowners use a monthly mortgage payment as a way to pay down the loan they received to purchase their property. That monthly payment often includes property taxes and homeowner’s insurance payments with interest and principal payments for the home.
Some homeowners are opting for a different payment strategy. Instead of paying once per month, they’re choosing to pay one every other week, making biweekly payments on their property instead. This may happen in a structured way with the support of the lender. Some homeowners may opt to make these payments on their own.
There are various advantages and disadvantages to consider when looking at a biweekly mortgage, a monthly mortgage, and the various interest structures which are involved. Here is a comparative look at the pros and cons.
Advantages of Biweekly Mortgage Payments
1. You’ll pay less in total interest.
NerdWallet gives the example of a $250,000 mortgage with a 4% fixed interest rate on a 30-year loan. Biweekly payments would save the homeowner $30,000 in interest charges over the life of the mortgage and pay it off in 25 years instead of 30 years.
2. You can do it yourself.
Take your monthly mortgage payment and divide it by 12. Then make a principal-only payment of that amount each month. You’ll still get the impact of the biweekly payment in the current format your lender prefers.
3. It even works for short-term stays.
Even if you stay in your home for 5-7 years, you can still save a few thousand dollars with this option. This advantage tends to apply to mortgages which offer a 15-year or 30-year fixed rate, but it may also apply to some long-term ARM options as well.
Disadvantages of Biweekly Mortgage Payments
1. You’re making more payments.
If you have a monthly mortgage, then you’re require to make 12 payments over the course of a year. On a biweekly schedule, you’re making 26 payments. That equates to one extra monthly payment in a 12-month period. If your budget is strapped for cash, you may find it difficult to come up with the money to make that extra payment each year.
2. There may be setup fees involved.
Some mortgage providers do not offer a biweekly mortgage plan. Some homeowners then turn to a third-party provider to make this happen, which means paying a setup fee of $300, monthly fees for processing, and a contract that may be difficult to break. If you’re converting a monthly mortgage to a biweekly one, your lender may have certain fees it requires as well.
3. You may experience pre-payment penalties.
Some lenders will not let you make extra principal payments on your mortgage without a penalty. Others may apply it to your principal plus interest balance instead. Check your terms to see what is possible under the structure of your current mortgage. If these fees are present, it would likely cost you more to pay biweekly than to pay monthly.
Advantages of Monthly Mortgage Payments
1. This is the standard option most families know.
A monthly mortgage creates a budgetary structure that is predictable and familiar. You know how much you’re going to pay and when you need to pay it. 90% of the mortgages which are active in the United States are 30-year fixed-rate mortgages under this structure.
2. You might be able to afford more house.
Because the monthly mortgage is typically a lower-cost payment schedule over a 12-month period, some households might be able to qualify for a bigger house with this payment schedule compare to a biweekly schedule. Much of this depends on your current debt-to-income ratio.
3. There could be tax benefits to the interest you pay.
Although a monthly mortgage means more interest costs, current tax laws in the United States allow for this interest to be deducted from your taxes. In the first years of a loan, most of the payments for monthly and biweekly mortgages goes to interest payments anyway. If you pay more interest on a monthly mortgage, you might be able to reduce some of your tax liabilities.
Disadvantages of Monthly Mortgage Payments
1. You will pay more over the lifetime of the mortgage.
Even if you have a low fixed interest rate for your mortgage, sticking to the payment schedule means you’ll be paying more in interest charges compared to a biweekly mortgage. You might pay less per month, but you will be paying more over your lifetime. It might not seem like much of a difference at first, but $30,000 is a big chunk of cash that could be going into your retirement accounts.
2. Your lender may not collect certain costs.
You may be required to pay your property taxes directly instead of having your mortgage lender perform this action for you. To be fair, this is a potential disadvantage for biweekly mortgages as well. Set aside a proportional amount for HOA fees, insurance and taxes to ensure you pay them on time in either structure.
3. It still requires a high credit score.
To qualify for a biweekly mortgage, you may need to have a credit score above 700. The best interest rates may not be available until you have a credit score of 750. With a 30-year fixed mortgage, you’ll still need good credit to get the best rates. Although you may qualify with a lower score, you may be asked to supply up to 20% of the home’s value as a down payment to get the mortgage.
Which Is Better: Biweekly Mortgages vs Monthly Mortgages
For most homeowners, the monthly mortgage is going to be the better structure to use. Unless the terms of your mortgage include a biweekly payment agreement, there is a good chance that your lender will simply hold your biweekly payments until the full amount is due each month. You’ll still get the benefit of paying the equivalent of one extra payment each year, but it will go no further than that.
Most biweekly mortgage payments go to pay principal plus interest unless the terms say otherwise, which negates the benefit of a lower principal amount.
Because monthly mortgage payments are lower and produce similar results, more households will benefit from this structure. That way, you’ll have more money to use for other projects or costs, like sending the kids to college one day.
Check what your lender allows. You may be able to restructure a monthly mortgage into a biweekly mortgage. Be aware of fees and costs that would negate any potential savings. At the end of the day, only you can decide which option is the best one for your finances.