Mortgage Repayment Options Explained
So you’ve got you’re mortgage approval, now the lender gives you the choice of several repayment options. You’ve heard about the standard monthly payments but what’s semi-monthly or accelerated bi-weekly? Which one can save you the most amount in interest and which one can pay your mortgage off sooner?
Here’s the down and dirty on the differences…
Let’s use this example:
Monthly Mortgage Payments
Monthly payments are just that, payments made once per month or 12 payments per year. Based on our example, the total annual mortgage payments are $6,979.20 ($581.60 x 12). Under this repayment option, it will take 25 years to pay off the mortgage in our example.
Semi-Monthly Mortgage Payments
Semi-monthly means payments are made on the first and the fifteenth of the month. You are making a total of 24 payments in the year. To calculate semi-monthly payments, you take the monthly payment and divide it by 2 ($581.60 / 2 = $290.80). At the end of the year semi-monthly payments still only add up to $6,979.20. ($290.80 x 24), the same as if you made monthly payments of $581.60.
Are there any savings making payments this way? Yes, but very little. The savings come from the fact that your paying down the principal quicker because your making payments twice per month as opposed to once per month.
Accelerated Bi-Weekly Mortgage Payments
Accelerated bi-weekly mortgage payments are a bit different. The difference between semi-monthly payments and accelerated bi-weekly payments is that semi-monthly payments have 24 payments per year while accelerated bi-weekly payments have 26 payments per year. You are now making payments every two weeks (26 weeks per year) and not twice per month (24 payments per year).
To calculate your accelerated bi-weekly payment, take the monthly mortgage payment, divide it by 2 and multiply it by 26 (every 2 weeks). Using the example, you’re total annual mortgage payment is $7,560.80 (($581.60 / 2 = $290.80) x 26).
Essentially you’re making one more payment per year ($7,560.80 – $6,979.20 = $581.60). By making accelerated bi-weekly payments, you will be saving money on interest and reducing you’re amortization period.
What Happens to my Mortgage?
The following chart shows the impact on your mortgage between monthly payments, semi-monthly payments and accelerated bi-weekly payments.
The saving between monthly payments and semi-monthly payments over 25 years is only $179.52. The largest benefit comes from accelerated bi-weekly payments. In the example, you save $12,437.31 in interest costs and reduce your amortization period from 25 years to 21.43 years.
There are lots of great ways to reduce the time it takes to pay off that mortgage and we would be happy to discuss various mortgage options and get you on the fast track to saving money with little effort.
Whether you’re purchasing a new home, looking to refinance you’re existing home, find a better rate on your existing mortgage or looking to get pre-approved for a mortgage, I have the knowledge and experience to help. Please call or email me for a personal appointment.
If this blog is as clear as mud, call me. I am here to clarity, educate, and support you throughout the process. You may only apply for a mortgage a few times in a lifetime; I process mortgages several times a day. Lean on me.