ARE ACCELERATED BIWEEKLY PAYMENTS BETTER THAN A SEMI-MONTHLY PAYMENT
The right payment schedule matters.
In the world of mortgages there are so many terms and rules to understand, many of which impact significantly the cost of your mortgage over time. We field many questions that impact what your mortgage will cost you. For example, we often are asked which is better, an accelerated bi-weekly payment better or semi-monthly payment?
In short, if you can arrange your banking in a way that you can make regular payments every two weeks then yes, a bi-weekly payment will put ahead of the game!
Lets have a quick look at the different payment schedules:
A monthly payment schedule is exactly what it sounds like. One payment is made each month, usually on the same date. Twelve payments are made per year.
Semi-monthly usually means that two payments are made each month. Many people stick with the traditional 1st and 15th but it’s possible to choose other dates if they make more sense for you financially. Twenty four payments are made per year.
ACCELERATED BI-WEEKLY PAYMENTS
Accelerated bi-weekly payments are made every two weeks. The big difference here is that bi-weekly payments are made 26 times per year which is the same as one extra monthly payment, or 2 extra semi-monthly payments per year. The extra payments are applied directly against your principal thereby saving you interest and shortening the amortization of your mortgage.
For those of you who prefer to see a picture, here’s a look at the difference between a monthly payment versus an accelerated biweekly payment.
With $300,000 mortgage @ 2.69% interest with a 5 year term over a 25 year amortization the monthly payment would be $1372.45. The Accelerated bi-weekly payment is exactly half (i.e. $686.23). The two extra payments made annually reduce the effective amortization to 22.3 years, which is 2 years and 9 months earlier!
It is our recommendation that whenever possible the borrower should choose the accelerated bi-weekly payment schedule. We also have some ideas for pre-payment options for when you have extra cash in your jeans, but we’ll save those for another blog!