With so many products and services available in today’s mortgage market, there are a lot of factors to consider when it comes to when and how to pay off your mortgage loan. But don’t worry, we’re here to help. Your broker will work with you to come up with an effective mortgage payment strategy that not only suits your unique situation, but also has the potential to save you tens of thousands of dollars over the long term.
In addition, the mortgage payment frequency you choose can be the key to ensuring you’re mortgage-free faster - allowing you to focus on your other financial goals a lot sooner than you ever thought possible. Typical payment options include:
· Monthly Payments
· Semi-Monthly Payments
· Bi-Weekly Payments
· Bi-Weekly Accelerated
· Weekly Payments
· Weekly Accelerated
You may be wondering why you would ever want to consider paying more often than at the average monthly rate. However, depending on your individual mortgage strategy and goals, increasing your payment frequency comes with some significant financial benefits, including the ability to pay down your principal faster, while reducing interest payments.
To determine which payment frequency might be right for you, here’s what you need to know:
Monthly Payments (12 payments per year)
Monthly payments are the default and most common type of mortgage payment among homeowners. Your regular payment will be withdrawn from your account on the same day every month (quite often the 1st), amounting to twelve full payments over the course of a year. The only drawback to the monthly schedule is it allows for more interest to accrue between payments (meaning you’ll pay more interest over the lifetime of your loan).
Ex: $1,000 x 12 = $12,000 per year
Semi-Monthly Payments (24 payments per year)
Simply put, semi-monthly payments represent your monthly payment divided in two. Under the semi-monthly schedule, funds will be withdrawn from your account twice a month (typically the 1st and 15th), each totalling half the monthly amount. Regardless of whether you opt to pay once or twice a month, you can expect to pay the same mortgage amount every year. The advantage of the semi-monthly payment frequency, however, is that it comes with a small savings in interest over time.
Ex: $1,000 ÷ 2 x 24 = $12,000 per year
Please refer to the comparison chart below for a comparison of interest saved.
Bi-Weekly Payments (26 payments per year)
Bi-weekly payments can be calculated by multiplying your monthly mortgage payment by 12, then divided over 26 pay periods within a year. Much like semi-monthly payments, a bi-weekly schedule allows you to pay twice a month (usually the 1st and 15th). However, with this approach, payments are slightly reduced, with a small amount of interest savings accrued based on an early half-payment each month. The bi-weekly payment schedule is often preferred by homeowners looking to time their mortgage payments with their pay dates.
Ex: $1,000 ÷ 26 x 12 = $461.53/ bi-weekly x 26 payments = $12,000 per year
Bi-Weekly Accelerated Payments (26 payments per year)
For homeowners looking to pay their mortgage off faster, a bi-weekly payment frequency may be the way to go. Here again, you’ll take your monthly payment, divide it by two and pay every two weeks, except this time, your payment schedule will amount to one extra monthly mortgage payment a year. How? Because, regardless of whether it’s the 1st, 15th, or 30th, you’ll still be expected to pay every two weeks over the course of a year – meaning you can expect two extra installments per year (twice a year at three payments per month).
Ex: If your payments are Fridays, then they might fall on the 5th and 19th one month, whereas the following month, they may fall on the 3rd, 17th and 31st.
Here again, this type of payment schedule will allow you to pay down your principal faster, while saving (thousands) in interest over the lifetime of your loan. It’s also an ideal frequency for homeowners with pay dates scheduled every two weeks - unlike those with monthly or semi-monthly incomes, who will be faced with a mortgage payment one a half times its regular size twice a year (i.e. $1,500 as opposed to $1,000).
Weekly Payments (52 payments per year)
In this scenario, your monthly mortgage payment is multiplied by twelve and then divided by 52. Here again, amounting to the same monthly payment, except you’re paying every week. But, you’ll accrue a small amount of savings in interest as three-quarters of your loan is being paid “early” each month. This payment strategy is useful for homeowners on a weekly pay schedule, seeking lower payments than the weekly accelerated option (more on that below).
Ex: $1,000 ÷ 52 x 12 = $230.77 / weekly x 52 payments = $12,000 per year
Weekly Accelerated Payments
Working under the same principle as bi-weekly accelerated payments (listed above), weekly accelerated payments help you pay your mortgage off faster through additional installments. Under this frequency, you’ll be expected to pay every seven days which, over the course of a year, will add up to four extra payments or a full mortgage payment.
Ex: If your payments are Fridays, then they might fall on the 3rd, 10th, 17th and 24th one month, whereas the following month, they may fall on the 1st, 8th, 15th, 22nd and 29th.