While monthly mortgage payments are the standard for many homeowners, choosing a different mortgage payment frequency can help pay off your mortgage sooner, or at the very least, make it easier to manage your household budget.
Regular Mortgage Payment Options
Here are the 4 types of regular mortgage payment frequencies:
Monthly – 12 mortgage payments per year (once per month)
= Annual mortgage payments (principal and interest) ÷ 12
Semi-Monthly – 24 mortgage payments per year (twice per month – typically the 1st and 15th of every month)
= Annual mortgage payments (principal and interest) ÷ 24
Bi-weekly – 26 mortgage payments per year (every two weeks)
= Annual mortgage payments (principal and interest) ÷ 26
Weekly – 52 mortgage payments per year (once per week)
= Annual mortgage payments (principal and interest) ÷ 52
Under each of the regular payment options above, you are paying the same amount annually. What we mean by this, over 1 year, your payments towards the mortgage are no more or less regardless of the frequency you choose. The only difference between the frequency choices is how often you pay.
**Note – Although the annual mortgage payments remain the same regardless of the payment frequency, there are slight savings over the lifetime of the mortgage by choosing a more frequent payment option (for example, on a $500,000 mortgage, a bi-weekly or weekly payment frequency can save you $900 – $1400 of interest respectively over the lifetime of a standard 25-year mortgage). This is the result of amortization (as less interest accrues on the principal with each payment made towards the mortgage).
The right option for you is going to be the option that works best within your budget – there is no right or wrong choice. For example, most employers pay their employees on a bi-weekly basis. For this reason, if you fall into this category, a bi-weekly mortgage payment might make it easier to manage your mortgage payments. Likewise, a monthly budget might make overall household budgeting easier as so many recurring bills are done monthly (e.g., phone and internet bills, insurance, Netflix, credit card bills, etc.).
Accelerated Mortgage Payment Options:
If you’re feeling ambitious and want to strategically pay off your mortgage sooner than the standard 25 years (without relying on mortgage pre-payment privileges), then here are 2 types of accelerated mortgage payment frequencies.
Accelerated Bi-Weekly – 26 mortgage payments per year (based on every two weeks) – Unlike regular bi-weekly payments, this payment is based on 13 months of payments being made within the year, rather than 12)
= Annual mortgage payments (principal and interest) + 1 month mortgage payment ÷ 26
Accelerated Weekly – 52 mortgage payments per year (once per week) – Unlike regular weekly payments, this payment is based on 13 months of payments being made within the year, rather than 12)
= Annual mortgage payments (principal and interest) + 1 month mortgage payment ÷ 52
What is an accelerated mortgage payment? What we mean by ‘accelerated’ is that 1 extra month’s worth of payment has been factored into your payment frequency. So, every 12 months, you are making 13 months’ worth of payments towards the principal. This ‘acceleration’ continues for each year that you have the mortgage and can result in paying off your mortgage within 21-22 years (3-4 years sooner!) based on a standard 25-year amortization. This equates to 10’s of thousands in savings over the lifetime of the mortgage.
Can I change my mortgage payment frequency?
You sure can. Most banks will allow you to change payment frequency at your request throughout the term of your mortgage (and at renewal). Administrative charges might apply depending on your bank/lender. Please verify with your bank/lender beforehand.
How Else Can I Pay My Mortgage Off Sooner?
If you opt out of an accelerated mortgage payment, you can still exercise your mortgage prepayment privileges. This will allow you to make payments towards the principal (at your leisure) which over time will help achieve the same idea as accelerated payments. Since this is not done on a disciplined schedule, it is easier to neglect this option. Prepayment privileges will vary from bank to bank, but standard pre-payment allows for between 15% – 20% prepayment annually.
Let’s chat to figure out which mortgage payment frequency best suits your circumstances. Call us today at (905) 455-5005.