On a biweekly schedule, you'll have two calendar months in which you end up making three payments. For the rest of the time, you'll make only two payments per month. As you can see, you would trim about five years from a 30-year loan term and also save $53,000 in interest by switching to biweekly payments.
It works like this: Biweekly payments are equal to 13 monthly payments in a year while traditional monthly payments are equal to 12 payments each year. By paying an extra month every year, you're paying extra principal, which shaves six to eight years off the life of the loan over time.
Let's use the example of a $500,000 30-year fixed-rate mortgage with an interest rate of 7.73%, the current national average. According to Bankrate's calculator, switching from a monthly payment to a biweekly payment will lead to you paying off your entire mortgage in 22 years rather than taking the full 30.
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
Refinance into a shorter term
When you refinance your home, you can pay off your home faster by replacing your 30-year mortgage with one that's a shorter term. With a mortgage refinance, you can shorten your loan term by selecting a 20, 15, or even a 10-year loan.
You decide to increase your monthly payment by $1,000. With that additional principal payment every month, you could pay off your home nearly 16 years faster and save almost $156,000 in interest.
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment. These calculations are tools for learning more about the mortgage process and are for educational/estimation purposes only.
If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
The 10/15 rule
If you can manage to pay 10% of your mortgage payment every week (in addition to your usual monthly payment) and apply it to the principal of your loan, you can pay off your 30-year mortgage in just 15 years.
The additional amount will reduce the principal on your mortgage, as well as the total amount of interest you will pay, and the number of payments.
Not only does a biweekly mortgage pay off the mortgage sooner, but it also saves the borrower $36,000 in interest over the life of the loan. Another advantage of a biweekly mortgage versus a traditional mortgage loan is that equity is built up sooner.
Paying twice the prescribed amount on a 30-year mortgage will cut the term to just shy of 11 years (130 payments). Does making two smaller twice monthly mortgage payments really pay it off significantly faster?
Most people with a 30-year mortgage won't keep the original loan for 30 years. In fact, the average mortgage length is under 10 years. That's not because these borrowers pay the loan off in record time.
As a general rule of thumb, making one extra mortgage payment per year at the start of your 30-year mortgage can shorten the term by approximately four to five years. You could potentially pay off the mortgage and own the home outright in 25 to 26 years instead of 30.
This is equivalent to 12 slightly-higher monthly payments of $1,252.85 — but this small difference is enough to pay off your full debt in just 22 years and cost you only $129,712.85 in interest. In other words: two extra mortgage payments per year will save you eight years and $56,798.72 in interest.
Ideally, you want your extra payments to go towards the principal amount. However, many lenders will apply the extra payments to any interest accrued since your last payment and then apply anything left over to the principal amount. Other times, lenders may apply extra funds to next month's payment.
Before paying off a loan ahead of schedule, it's important to read the fine print. Based on the terms of your loan, you could be subject to a prepayment penalty for paying off your mortgage early. Typically, loans older than three years are not subject to this type of penalty.
When you pay an extra $100 on your monthly mortgage payment, that entire amount goes to principal. You'll reduce your total balance much more quickly when you make an extra payment that goes directly to repaying your balance. You could cut around four years off your repayment time with just an extra $100 per month.
Make Extra Principal Payments
Paying more toward principal is the primary way to pay off a 30-year mortgage early. Here's an example of how interest adds up: Assuming you buy a $350,000 house and put 10% down on a 30-year mortgage at 5.5%, this mortgage calculator shows that total interest will be $328,870.
“Shorter term mortgages will have higher monthly payments but will also likely have lower interest rates,” Frederick said, “Refinancing into a 10-year term may be a stretch for most homeowners but doing so essentially compels the homeowner to pay off the mortgage in 10 years and likely comes with some of the lowest ...
Some people get a 30-year mortgage, thinking they'll pay it off in 15 years. If you did that, your 30-year mortgage would be cheaper because you'd save yourself 15 years of interest payments. But doing that is really no different than choosing a 15-year mortgage in the first place.