PAYMENT FREQUENCY
It’s almost always better to pay sooner.
If late night television has taught us anything, it’s that we should never pay full price right now. We should pay for things in small, convenient, monthly instalments. And we shouldn’t ever pull out a calculator to figure out how much more we’ll end up paying.
A friend of mine recently showed up for lunch with a brand new smart phone. This thing was gorgeous: massive touch screen, high-resolution display, razor thin profile.
She bragged that it “only” cost her $129 with her new three-year mobile contract. “Its regular price is $769!” she crooned. I didn’t have the heart to tell her what I’ll tell you now: 36 months of bills add up. If she’s only paying an extra $25 each month, that adds up to $900 in three years. Plus the $129 she shelled out at the start of the contract? Her bargain smart phone — regular $769 — “only” cost her more than a thousand dollars.
The lesson here is, it almost always makes sense to pay sooner, rather than later. So when your lender gives you the choice of making mortgage payments monthly, biweekly or semi-monthly, pick the one that makes the most sense to you. (Someone who is paid twice per month might not want to go with biweekly payments, for example.) But keep in mind that more frequent dates will reduce the amount of interest you pay, and increase the amount of each payment that goes to principal.
The bottom line is, my friend will pay almost $300 more for her phone, and she’s locked into a service contract for three years. If she’d paid for the phone outright, she’d have lower monthly bills and the freedom to move to another provider — if she had broken out her abacus and done a little number crunching. (Or at least asked me to check out the contract before she signed!)
Monthly is exactly what it sounds like: one payment is made each month, usually on the same date. A month’s worth of interest is charged first and foremost, with the remainder of the payment applied to principal. In the past, banks liked to stipulate the same day for everyone: the 1st or the 15th were popular. With modern computerized banking, however, it’s possible to choose pretty much any day of the month. (If you pick the 30th, of course, February’s payment will come on the last day of the month.)
Semi-monthly usually means that two payments are made each month. Many people stick with the traditional 1st and 15th we mentioned above, but it’s possible to choose other dates if they make more sense. There is no advantage to this payment option over a monthly payment.
Accelerated Biweekly payments make even more of a dent in the principal, as they are made — you guessed it — every two weeks. Like semi-monthly payments, they lower the principal a little bit more in the second half of each month, as only two weeks’ interest has accrued between payments.
The big difference maker here, though, is that biweekly payments are made 26 times per year. There are two extra payments over semi-monthly schedules, having a marked impact upon principal reduction. This payment option is kind of like a forced savings plan to pay off your mortgage sooner.
