Managing Money

Don’t Pay To Save With Biweekly Mortgage Payments

using calculator, biweekly mortgage payments
Written by Brian O'Connor

You’re better off saving that money for an emergency and to pay other debt.

Should you try to pay off your mortgage early making biweekly mortgage payments? That’s a good question for people who are trying to get debt free. The answer depends a lot on what the rest of your debt and financial situation looks like.

Because a mortgage is a simple-interest loan, paying down the principal can drastically cut the total interest you pay. Example..

Borrowing $100,000 on a 4.5 percent, 30-year mortgage and making the minimum $836 monthly payment means that, over the life of the loan, you’ll pay total interest of nearly $136,000 – more than what you borrowed.

Add just $100 a month, and your total interest drops to $56,000. Plus, you cut more than eight years off the time it takes to get your loan balance to $0.

Should you do it? The answer is no if you have other debt and no savings. In general, you want at least a few thousand dollars in an emergency fund before you go paying more than the minimum on any debt you owe. If you have other debt, the interest rate is likely to be much higher than your mortgage, and you can deduct your mortgage payments if you itemize your tax return, creating an even lower effective cost for yourself.

But if making biweekly mortgage payments makes sense, it can be a good financial move. And it’s one you can do all by yourself.

There are plenty of companies offering biweekly mortgage payment plans that promise big savings, but you may not really save all that much and you’ll pay unnecessary fees when you can easily set up biweekly mortgage payments for free.

Biweekly mortgage payments works like this…

  • Instead of sending one payment per month, you send a half payment every two weeks.
  • Each year’s 26 payments add up to equal one extra annual mortgage payment.
  • Because balances on mortgages are computed only once a month, the payment schedule itself doesn’t save you any money – the entire savings comes from that 13th annual payment.

In our example, this approach cuts your payoff time by 4 1/2 years and saves you about $24,000 in interest.

You can do this yourself by going online or, when you send in your payment coupon, adding a note to direct that extra payment be applied to your principal. Then send in a half payment every other week.

But there still can be a downside.

Making extra principal payments on your home loan means you’re tying up cash in something that you can tap only by selling the house or taking out a home equity loan. And, as we saw during the great recession, homes can lose value, making it impossible to tap that equity.

One way to balance liquidity with pre-paying a mortgage is to save one-thirteenth of your monthly payment to a separate savings account. Let that money accumulate all year, where you can earn a bit of interest but, more importantly, where you can access the cash if you need it in an emergency. Then, at the end of the year, send in that extra payment. It doesn’t save as much as adding to your principal payment each month, but it still cuts your total interest.

Timing the payoff of your mortgage should be part of your long-term financial plan. In general, you’ll be better off using extra cash to build an emergency fund of at least three months’ worth of living costs, saving for your big annual expenses, paying off higher-interest debt and investing for retirement, especially if you aren’t fully claiming any employer match in a 401(k) or similar workplace account. But if all that’s taken care of, knocking off your mortgage early really does make it a home sweet home.

Brian J. O’Connor is the author of the award-winning budget book, “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”

About the author

Brian O'Connor