How do biweekly mortgage payments work?

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What are biweekly payments and why do people choose them?

Biweekly payments are half mortgage payments made every two weeks. They are a subtle way of paying down principal without paying large lump sums of money at a time. For most people, paying half a mortgage payment every two weeks doesn't feel any different than making one payment each month, especially those people who are also paid biweekly.

Here's why they are not the same:

There are 52 weeks in a year, so paying every 2 weeks is 26 half payments. 26 half payments are equal to 13 full payments annually instead of 12 monthly payments.   

How much of a difference do biweekly payments actually make?  

Quite a bit.  Let's take an example of a 30 year fixed mortgage for $150,000 at 6%. Paid off as agreed, a homeowner would make 360 payments of about $900 a month. The total of those payments over the life of the loan is about $324,000. The same loan with biweekly payments would be $450 every two weeks. This would be 638 half payments (26 per year) and the loan would pay off in about 24.5 years. The total amount paid over the life of the loan with biweekly payments is about $287,000. In this example, the interest savings over the life of the loan would be $37,000 and it was paid off 5.5 years early. 

Here's a chart showing the principal balance for this example in 1 year increments (click for a larger version):

**Important note: This is a simple example for a homeowner who does not escrow their taxes and insurance. Biweekly payments with escrows actually pay off even faster because you are making 13 escrow payments as well and the overage goes to principal.

Are there any drawbacks?

Maybe. Some banks will charge a fee for this payment arrangement, either upfront or as you go. Setup fees can range from $250-500 upfront and $4-9 per payment if you pay as you go (not recommended). Some banks do not charge for biweekly payments. In the grand scheme of things, if you stay in your home long term and keep paying biweekly, the setup fee is a drop in the bucket. However, if you only plan to be in your home for a short time, the setup fee may represent a significant portion of the savings you hoped to realize.

How do I set up biweekly payments?

Biweekly payments are offered by most lenders and banks. You may be able to set up a biweekly payment system with your current bank without having to refinance. One word of caution, make sure you can afford biweekly payments and that you realize you are paying extra each year. Many people are paid every two weeks, so if you can afford it, it's an easy way to cut down the interest you pay over the life of your mortgage without changing your budget drastically.

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