Tell me if this sounds familiar: It's the first of the month, your humungo mortgage bill is due, and you just have enough money in your checking account to cover it, since you were last paid… when? Maybe it was 11 days ago? Guess you're eating pasta for every meal and staying in until that next paycheck comes in.
It's not just you. According to the Bureau of Labor Statistics, more than a third of U.S. companies (36.5%) pay their employees every two weeks; but that doesn't mean those biweekly checks sync up nicely with your bill's due dates. Paycheck drop into your bank account on the 1st and 15th when your mortgage is due on the first and your credit card is due on the 15th? Perfect. But when you're paid on the 9th and 23rd? Ugh. Because a month is roughly four weeks long (but not exactly, except for three out of four Februarys), you probably, like most people, break down your monthly budgets based on two paychecks and deal with the precariousness that comes with differing due dates. You live like a college student the week after your mortgage is due, and then like a well-off adult when the second paycheck comes in.
But what if I told you there's an easy way to make your income more stable that also saves you money in the long run? It's simple: Just send in a half mortgage payment with every paycheck. You won't feel the boom and bust of your paycheck cycle as hard, and you won't notice that big of a difference in your month-to-month finances. You'll also save tens of thousands of dollars over time.
It's not magic: It's math. You're basically making one extra mortgage payment per year that goes entirely towards paying down the balance. To see this in action, let's run some numbers using this Bankrate calculator: Say you've got a 30-year, fixed-rate mortgage for $300,000 at 4.5%. Your monthly payment would be about $1,520, plus property taxes and homeowners insurance. Making regular monthly payments of $1,520 for 30 years, you'll pay about $247,220 in total interest over the life of the loan. If you switch to paying your mortgage biweekly—paying half, or $760, every other week as your paycheck comes in—you'd pay $203,661 in total interest. That's more than $43,000 in savings.
Instead of making 12 payments of $1,520 (or paying $18,240 annually), you're instead making 26 payments of $760, $19,760 annually. Each year, you're chipping an additional $1,520 off the principal of the loan, saving you an additional $43,000 in savings over the term of the loan. What's more, you'll build equity faster, and you'll have your home paid off a full five years sooner—the equivalent of giving yourself a roughly $18,000-a-year raise 25 years from now.
This is all to say you just need to be sure to specify in your payments that the excess funds should be applied to the loan's principal, not the interest or escrow.
To be fair, this approach doesn't always make sense. First, your lender could actually charge you for accelerated payments. "Prepayment penalties would likely override any potential benefit," Matt Becker, a certified financial planner and founder of Mom and Dad Money, says. "You can check your loan document or add your lender to find out if this would be an issue."
That said, prepayment penalties are now less common on mortgages than those issued before the 2008 financial crisis. According to the Consumer Financial Protection Bureau, they're more likely to apply only when paying off the entire loan at once. But it's still crucial to check with your lender.
Secondly, if you have other financial priorities, your money might be better saved elsewhere. "While paying off your mortgage quicker is great, it may not be worth it if the extra payments inhibit your ability to save for other important goals like retirement or your child's education," Becker says. "It's always a good idea to look at these decisions within the context of your entire financial plan."
Also, those magical "three-paycheck months" that come along twice a year if you're paid biweekly will be less magical. If you generally do something productive with those "bonus" checks, like paying down a big chunk of debt at once or stashing the extra money for a vacation fund, those financial goals will take a hit. But you can save some of the magic by skipping the extra house insurance and property taxes on the third paycheck. Since both of those bills don't accumulate interest, there's no money-saving advantage to making an additional payment and paying those off early. Instead, you can stash away that extra bit of money for savings or something more fun.
Paid on a more predictable schedule or simply loathe to give up those bonus paychecks? You can also pay down your mortgage faster without sacrificing so much by simply rounding up your payment (again, specifying that extra funds should be applied to principal). So, instead of writing a check for $1,520.08 and worrying about decimal points, round it up to $1,600 (or whatever fits your budget). You'll similarly shave a couple of years—and thousands of dollars in interest—off your mortgage.