Crunch My Mortgage

Are biweekly mortgage payments worth it

A true biweekly schedule pays the loan off sooner because 26 half-payments are 13 full payments a year. The interest saved is the extra principal. A company that charges a fee to debit you, and still pays the servicer monthly, is selling the fee.

By Crunch My Mortgage Editorial Team Sources How we test

Half the payment every two weeks sounds like a different loan. On a standard monthly mortgage it is an extra principal payment, delivered in smaller pieces. The biweekly calculator compares three schedules on the rate and balance you type: the ordinary monthly payment, a half-payment every two weeks with interest counted 26 times a year, and the same extra principal added as one-twelfth of a payment on each monthly bill. The third one is the useful control. If it saves nearly the same interest, the calendar is not what is doing the work. The rate below is an input, not a quote.

Where the thirteenth payment comes from

A monthly mortgage has 12 payments a year. A biweekly calendar has 26 periods, because 52 weeks divided by two is 26. Half of the monthly payment, taken 26 times, is 13 monthly payments. The extra one is principal, once the interest due for the period is covered. Principal paid earlier is principal that does not accrue interest later, so the loan ends before the original term and the interest total falls. That is the whole mechanism.

The calculator’s biweekly schedule applies interest at one twenty-sixth of the annual rate each period, and it pays half the monthly principal-and-interest amount. A servicer that actually accepts biweekly payments and applies them as they arrive will look like that schedule, with small differences for the way the servicer counts days. Many servicers do not apply a payment until a full monthly amount is in hand. Two biweekly debits then become one monthly payment, and the extra full payment shows up only in the two months a year that contain a third debit. The interest savings are delayed until that extra payment is applied. They do not disappear, if the extra payment is in fact applied to principal. They are smaller than a schedule that credits principal every 14 days.

You can produce the same extra principal without a biweekly debit. One extra monthly payment a year, or one-twelfth of the payment added every month, is the same 13 payments. The extra payment calculator takes a monthly extra, a yearly extra, or a lump sum and shows the shorter term. The biweekly calculator’s “one-twelfth” column is that monthly version of the same idea, so the two pages can be checked against each other.

What a third-party plan has charged

The Consumer Financial Protection Bureau has sued companies that marketed biweekly mortgage programs. In a 2015 case, the Bureau described a program that debited half the monthly payment every two weeks, which is the 13-payment math, and charged a setup fee of up to $995 plus about $84 to $101 a year in processing fees. The district court later found the conduct deceptive and abusive. The Bureau’s case against another payment company described an enrollment fee of $295 and a transaction fee, typically $2.50, on each debit. That order says the company held the money and sent it to the servicer on the monthly schedule. The biweekly debit did not create a biweekly application of principal. The advertisements had said it would.

Those are records of specific cases, not a current price list. The point that transfers is the fee. The calculator’s interest savings assume every dollar of the extra payment reaches principal and that nobody takes a setup fee or a per-draft fee out first. A fee comes straight off the savings. A program that also delays the application of principal gives you less than the biweekly column and charges you for it. Paying the servicer yourself, as an extra principal payment the servicer knows how to identify, has no enrollment fee. Fannie Mae’s servicing guide requires a servicer to accept a principal curtailment the borrower identifies as one, on a current loan. That is the direct path. It is not a product.

Worked example

Balance $280,000, note rate 6.5 percent, original term 30 years. No taxes, insurance, or mortgage insurance are in the payment. The monthly principal and interest is $1,769.79.

  1. Half of that payment is $884.90. Twenty-six of those half-payments are $23,007.40 a year. Twelve monthly payments are $21,237.48. The difference, $1,769.92, is the extra principal per year. It is one monthly payment, within a few cents of rounding.
  2. On the monthly schedule the loan runs 30 years and the interest is $357,125.12.
  3. On the biweekly schedule, interest counted 26 times a year, the loan runs about 24.2 years (24 years 2 months). Interest saved against the monthly loan is $82,251.83.
  4. Add one-twelfth of the payment, $147.48, to each monthly payment instead. The loan runs 24 years 2 months. Interest saved is $81,438.44. The gap between that figure and the biweekly savings is the difference between crediting principal every two weeks and crediting the same extra dollars once a month. It is not a different amount of extra principal.
  5. A setup fee of $995, the top of the range in the Bureau’s 2015 description, is $995 that never becomes principal. Subtract it from the biweekly interest savings and the net is $81,256.83. A yearly processing fee continues after that and reduces the net further. The calculator does not subtract it, because the fee is not part of the loan.

The interest saved is real if the extra principal is applied. It is not a reduction in the rate. The note rate stays 6.5 percent. You paid more money, earlier, and so you rented the balance for fewer years. Someone who cannot spare the extra $1,769.92 a year does not get this result by relabeling the same 12 payments. Splitting the same annual dollars into 26 debits, with no thirteenth payment, does not shorten the loan.

What to check before treating a draft as a payment

The question for the servicer, rather than for a third-party draft company, is whether a mid-month partial payment is applied to principal or held until a full installment arrives. If it is held, the biweekly column overstates the savings and the one-twelfth column is the closer model, provided the extra amount is marked as principal. A payment that is held and then applied late can also be handled as a regular installment rather than as a curtailment. The way the payment is identified matters as much as the amount.

Mortgage insurance, if you have it, follows its own rule. Extra principal can move the date you may request PMI cancellation, because that request can use the actual balance. It does not move the automatic 78 percent date, which follows the original schedule. FHA annual MIP on a post-2013 loan does not end because you paid biweekly. Those rules are on the PMI removal calculator and the FHA MIP calculator. Interest savings and mortgage-insurance cancellation are separate results.

A budget that depends on two paychecks a month is not the same as a biweekly loan. Aligning drafts with paydays can make the extra payment easier to fund, and it can also overdraw an account in a month with three drafts. The calculator has no view of a paycheck. It only amortizes the loan.

Sources