Mortgage “Half” Payments: How Much Do They Save?

One frequent question I’m often asked is whether or not paying half of a mortgage payment twice a month versus paying a full mortgage payment once a month is actually worthwhile.

Let’s say, for example, you’re in the situation that Paul, one of my readers who wrote in recently, finds himself in. He just took out a $219,000 mortgage. His monthly payment on that mortgage is $1,300.89. Paul wants to know whether paying half of the mortgage twice a month will save him a significant amount.

The first thing he needs to do is make sure that his mortgage allows early payments – and how they work. Make a call to your lender and ask them how often interest is compounded (this needs to be daily or compounded monthly based on the average balance of the month – if it only compounds monthly, paying in advance won’t help), plus how multiple payments during a month are applied to your loan (they must be applied as soon as received for this to work). Most loans work this way, but not all.

There are two options with making early payments.

First, Paul can literally make two payments a month – say, on the fifteenth of every month and on the last day of every month. This means, over the course of a year, Paul pays the exact same amount in principle that he would otherwise pay. The only difference is that on the fifteenth of each month, he pays in half of his payment and at the end of each month, he pays in the remainder of his payment.

In my calculations in Excel, I assumed monthly compounding using the average balance of the last month. Using this method, I calculate that this method will save Paul just over two months’ worth of balance on the mortgage. He’d save $2,931.33 in interest, which would mean he would be able to skip his final two payments and make only a partial final payment.

However, a superior method of doing this would be to simply make a payment equal to half of the amount of the monthly mortgage bill every two weeks. Over the course of a year, this adds up to one extra full payment: since there are fifty two weeks in a year, you’d make 26 half payments, and thus 13 full payments.

In my calculations, I again assumed monthly compounding using the average balance of the last month. I calculated that this method will save Paul $41,117.09 over the course of the loan. His final, partial payment would be issued just shy of five years early.

This method falls perfectly in line with many income schedules (the federal government, for example, issues paychecks every two weeks), which means that you can just allot a certain amount from each paycheck directly toward your mortgage and then not think about it again.

For me, at least, twice-a-month payments would not provide enough benefit to be worth the management hassle of them unless it happened to line up directly with my paychecks.

On the other hand, biweekly payments – once every two weeks – do provide a lot of financial incentive to give them a shot. Add on top of that the fact that it’s directly in line with many pay schedules and that would seem to be a winner to me.

In a nutshell, simply paying twice a month doesn’t save much at all, but paying once every two weeks saves a lot. Yes, one or two fewer days per payment can save you tens of thousands at the end of the payments.

Good luck.

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  1. Stacey says:

    If your bank doesn’t allow you to make “half” payments, but you get paid every two weeks, you can still do this.

    Each year, there are two months in which you get three paychecks. Use that third paycheck to make an additional “half” payment and you’ll get the same result – 13 full payments, trimming a few years off the mortgage.

    In our house we’ve got one bi-weekly paycheck and one monthly paycheck. This has worked well for us, adding a half payment twice a year.

  2. Maureen says:

    For such a substantial savings, it’s definitely worth any hassle! When we took out a mortgage to finance a house addition we arranged weekly payments that are automatically deducted from our bank account. This amounts to huge savings in interest and really isn’t much hassle at all. We can also make additional payments (up to 10% of the principle ) each year.

  3. friend says:

    principal

  4. EmilyP says:

    We discussed doing this when we were setting up our mortgage payments, and in the end decided that it made more sense (for our situation) to just set aside the income from the two “extra” biweekly paychecks per year, rather than making the extra half-payments. We can decide on a situational basis (twice a year) whether the mortgage is the best place for that money. So far, it’s made more sense to spend it on not flattening the emergency fund for medical expenses one home repair – but I expect the day will come when an extra mortgage payment is the best choice.
    My point being that it’s not “free money”, but a variant on an automatic savings plan; if you wouldn’t choose to put that extra paycheck into a long-term savings vehicle with a guaranteed interest rate equal to your mortgage rate, then you shouldn’t choose to put it into the mortgage.

  5. Troy says:

    People don’t “take out” mortgages.

    Mortgages are security instruments.

    People GIVE mortgages. They GET a loan in exchange for the mortgage. The bank “takes out” the mortgage.

    And by simply adding $110 to principal to his monthly payment he accomplishes the same thing.

  6. Shevy says:

    Okay Trent, I’m confused. Have you changed the way moderation works or is it acting up on you again? I just posted a comment from my usual computer. It contains no links or no-nos but it’s awaiting moderation. I guess we’ll see how fast it appears….

  7. Ben says:

    Most of the savings in interesting from paying bi weekly is related to making 13 payments a year and not 12.

    if you pay monthly you make 12 payments.

    if you pay bi weekly 52/2 you make 13 payments.

  8. thisisbeth says:

    Like EmilyP, I make a choice on the extra paycheck months. Every paycheck, I put half of a mortgage payment into savings. After the second paycheck of the month, I pay the mortgage. So far, I’ve only had one extra paycheck since buying my house, and the money has gone other debt. But since I have the framework in place for extra payments, in the future extra money will go towards the house.

  9. Michelle says:

    Really, the feds pay every 2 weeks? Not if you’re military. We get our checks on the 1st and 15th. If we got paid every 2 weeks then this would make sense, but since we get paid twice a month, we’ve decided to just pay once a month for now and focus on getting rid of other debt (much to the chagrin of my FIL).Once that’s paid off (appox 5 years) we’ll start throwing extra money at the mortgage.

  10. Diane says:

    Can’t stress this enough – Pre-pay your mortgage ONLY if you have NO credit card debt, NO student loans, AND you have fully funded all retirement options available to you. Compound interest works in your favor for retirement savings and inflation works in your favor for mortgage repayment. If you don’t understand these concepts, DON’T prepay another cent until you do.
    Another approach is to save enough in your own accounts until you have enough to pay off the whole mortgage balance. That way, if life hands you lemons, you have something with which to make lemonade.

  11. Kara White says:

    Michelle: We get paid twice a month too. Maybe he was talking about state and local govt. All of the fed jobs that I know get paid twice monthly.

    Diane: I’ve tried to understand that concept. Really, I have. It just doesn’t make as much sense to me as this: When we pay off our mortgage, we’ll have almost 1200 per month…PER MONTH extra. This is a really big deal for us, so we’ll continue to try to pay our house of early.

  12. Dave says:

    As much as I am a fan of paying off one’s mortgage (which I have), I have to say Diane’s plan of paying off credit cards and student loans first and fully funding retirement plans next is a wise move. I did it in that fashion and I still ended up paying off a 30 year mortgage in 15 years. As your cash flow goes up by paying off expensive credit card debt and funding retirement accounts, you can toss an extra principal payment toward the mortgage every month. Run off an amoratization schedule and you’ll see an extra few bucks put toward the principal at the beginning of the loan shaves off months and months of future payments. I became fully debt-free and had a decent amount in my 401(k) by the time I was 45 by doing just that.

  13. Kevin says:

    I used to feel like Dave and Dianne. “Why should I pay down a 6.5% mortgage if I can earn 8-10% in the markets?” I asked myself.

    That was 10 years ago. A decade of completely flat market performance has changed my opinion dramatically. A guaranteed 6.5% tax-free return is looking pretty good right about now. I’m no longer so sure the markets can beat that over the next 10 years.

  14. Mule Skinner says:

    I was married to a . . . spouse . . . whose money philosophy was different from mine. I worked at paying the mortgage off early while she worked hard at having no cash left over from one payday to the next; and along the way we got divorced; and of course she got half of the equity.

  15. John S says:

    @Trent – When I bought my house last year, I took an “alternate” approach to making extra/early mortgage payments: I simply asked my bank, up front, to amortize the loan over 27 years instead of 30. They thought it was a strange request, but agreed to do it; I think my loan officer was more amused than anything else. It essentially amounts to the same thing: lower overall interest paid, and an earlier settlement date. I’d imagine that most banks would be willing to tailor the loan in this manner, if you were to take the initiative to ask.

    The main drawback being, of course, that my “extra” payments are not optional, since my loan is structured around the 27-year payment. However, it’s a great way to throw your hat over the fence and commit the extra money without trying to specially budget that extra/early payment.

    @13 Kevin – I totally agree. Low-return sure-things are looking pretty good these days.

    @14 Mule Skinner – I feel for you, man. That’s the risk we all take when we get married. Divorce law leaves a lot to be desired, but you knew that going in. Look at it this way: at least you’ve cut your losses going forward. (Now it’s up to you to actually go forward.)

  16. Lauren says:

    Michelle and Kara, I work for the federal governement (Social Security) and I most definately get paid every 2 weeks. I’ve actually worked for the county and state too, and in every job have gotten paid every 2 weeks.

  17. JoeTaxpayer says:

    Most Banks will not accept a half payment, and if they do, will likely apply it as a partial payment as if it were received on its due date.
    Further, most banks do not apply the payment any differently than an exact on time payment whether it’s received two weeks early or up to the end of the grace period.
    As others stated, setting up your own bi-weekly, resulting in 13 full payments per year, is a great idea.

  18. Carey says:

    There is almost no advantage to paying twice a month because a) 99% of loans have interest calculated on a monthly basis. It is VERY RARE to have a mortgage with daily interest; and b) The interest savings is negligible. Trent gives a figure of $2,931.33 (which I assume is over the life of the loan), but that seems a bit high. My own calculations put it at about $90.00 (over 30 years). I’d like to see that spreadsheet.

    As for paying bi-weekly, that works just as Trent says. Plus, if you’re not paid bi-weekly or your mortgage company won’t accept payments in bi-weekly chunks, you can just increase your payment by 1/12 each month and it will do the same thing. Hopefully, your lender at least lets you do that, and you also have to make sure they apply the excess to principal (and not the escrow account if you have one). If not, as a last resort, just send in an extra payment at the end of the year, and ask for it to be applied to principal.

    NEVER pay a third party company to handle biweekly payments for you. The big mortgage companies will do it for free – those third party companies will charge hundreds of dollars (in “set up” fees).

    And like others have said, if you have any debt that has a higher interest rate than your mortgage, or any match in your 401k that you aren’t yet taking full advantage of, any extra money should go there first.

  19. Dawn says:

    When we got our mortgage, we got an interest rate deduction, and a shorter mortgage (25 v. 30 yrs) for doing this. Plus, if, for whatever reason, it doesn’t quite work out to being 25 years (in Trent’s calculation, I think there was a partial payment left), the bank agreed to forego any other payments. Quite frankly, it isn’t hard, it’s pretty easy and works well with our finances.

  20. Kathy F says:

    Kevin said: “A guaranteed 6.5% tax-free return is looking pretty good right about now.” Keep in mind that 6.5% return may be reduced if the person claims mortgage interest as itemized tax deductions. Thus if the owner is in the 25% tax bracket and itemizes the interest as deductions from taxable income, that mortage is only costing them (1-0.25) x 6.5% = 5.06% interest and even less if you factor in any state tax. For example, my mortgage of 4.75% is really only costing me 3.29% (considering 25% Fed and 5.75% state income tax) as long as I am able to itemize.

    I am also a federal employee (EPA) and get paid every two weeks.

  21. Ben says:

    I was wondering if someone can tell me how to calculate this out for my own mortgage?

    Thank you.

  22. Carey says:

    Ben – a spreadsheet works best. If you don’t have Excel, try Google Docs.

    I just have a row for each month (up to 360 for a 30 year loan) with the following columns: Beginning Balance, Interest, Principal, Ending Balance.

    Just set Beginning Balance to the Ending Balance from the previous row (the first one should be set to the opening balance of the loan).

    Interest (if calculated monthly) can be calculated as that row’s Beginning Balance / 12 * interest rate.

    Principal is your monthly payment (P&I portion only, no escrow) minus that row’s Interest.

    Ending Balance is that row’s Beginning Balance minus that row’s Principal.

    To play around with it, change the formula for Principal to add, say, $100 a month, or 1/12 of your payment. Then just look for the row that has a 0 or negative ending balance, and that is the month that the loan will be paid off.

  23. Adam says:

    American mortgage articles always interest me, as it’s such a different setup here in Canada. I guess the closest comparison is that it seems that all of Canada runs on ARMs (at least to my understanding of ARMs).

    Now, for my wife and I, our initial amortization was a 25 year period, but by going with biweekly payments, we’ll actually finish paying it off at around 21 years. Now, this is also on a 5 year initial term, with rates to be negotiated at the end of that.

    Currently we’re sitting at around 18 years amort left. If we decide to move, we’ll likely restart the 25 year amort (maybe move to 30, but probably not), but stick with an initial 5 year/bi-weekly schedule.

  24. Bill says:

    We decided against doing this. We do plan on paying off our mortgage early but we put the extra money in to mutual funds instead. Paying down the mortgage doesn’t really reduce risk till it is completely done. We expect it will take us 7 years at our current savings rate to save enough even if the mutual funds don’t produce much. There is some risk here but we’ve been investing for many years.

    We probably won’t actual pay off this mortgage anyway. After the kids go off to college we’d like to build a much smaller house. This money will allow us to pay cash for this new land and construction while not having to live in a rental or deal with bankers deciding if we are going fast enough.

  25. Faculties says:

    To complicate what Kathy F. said at #20, in the last years of your mortgage you may not be deducting the interest. The interest starts out as a large proportion of the payment, and over time the payment is more principal and less interest, or at least that’s the way mine worked. At a certain point the interest was so low that it worked out to be less than the standard deduction; so I wasn’t deducting interest any more.

  26. John S says:

    Yes, Faculties, any deduction is only valid if you’re itemizing more than the standard deduction, this is true. However, the vast majority of homeowners have plenty of other tax deductible expenses (property taxes, depreciation, child care, charitable donations, etc,) which put us well over the standard deduction threshold.

    If you’re under the threshold, then good for you; that means you’re benefitting from the standard deduction in all its glory. That’s like getting free money. Enjoy it. Cheers.

  27. LMoot says:

    I don’t plan on prepaying my mortgage only because this is my first house and I don’t plan on being in it long enough to reap the benefits of paying my mortgage early. They’re already holding 20%+ of the cost, in my money, in equity-that’s enough. I got a fixer upper and that money will be better spent fixing up the house (which raises value so that I don’t have to put more of my money in to raise equity, without raising value) and putting as much towards retirement. I only think prepaying the mortgage really is only worth it if you think you’ll be able to stay in the house for at least a few years mortgage-free.

  28. Jon says:

    Trent – it seems as though the difference you’ve outlined is not so much the result of paying every 2 weeks versus paying 2 times per month, but rather than difference is that in the 2 week model you are paying MORE in principal – an extra payment each year – which reduces the compounding effect on the interest much faster. A similar savings could be made by simply paying one extra payment per year on your mortgage, regardless of whether you worked that in by allocating into two week blocks or just paid a double payment on Dec 31st each year. Sound correct?

  29. littlepitcher says:

    Any reason that mortgage couldn’t be negotiated to 25 or 20 years?
    Similar effect, lower interest rate.

  30. Gordon Fitzgerald says:

    The only real advantage to paying every two weeks is being able to budget equally with each paycheck. If you want the same result of a biweekly payment you can simply get a 25 year fixed mortgage vs. a 30 year fixed mortgage. Since there is no interest benefit you can always make a payment on your own when you receive your 26th and 52nd paycheck of the year.

  31. Shevy says:

    Just tried to repost my original post from yesterday morning that’s still in moderation and it went for moderation *again*! I’m really frustrated and would like to know what’s going on. There’s no link or anything else weird in it and I’ve been able to post comments on other posts and to post a shorter comment asking about moderation yesterday.

  32. Nicole says:

    Did you use a naughty word?

  33. Shevy says:

    Not at all. I was just talking about paying my mortgage (when I had one) weekly. I had a 25 year mortgage but in under 9 years I paid off $30,000 on a $92,000 mortgage. It was totally pertinent to the topic. Plus, I’ve been waiting for a day and a half now for the comment to be approved.

  34. Tim says:

    I have my Wells Fargo mortgage take out a half payment on the same day I get paid every two weeks. For the way they apply extra payments, it doesn’t get applied until I’ve put a full payments worth toward it, but the same deposit/withdraw is worth it alone plus the added benefits of finishing up ~5 years earlier with less interest.

  35. While the information regarding mortgages only compounding monthly is probably good for your American audience, it would be nice to occasionally see the caveat *in the US* on your entries. It’s not the case overseas and your readership is NOT only american.

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