Your mortgage payment is likely your largest monthly expense, and it is one that many people don’t fully understand. 

When you make more frequent mortgage payments you are paying more toward your principal, saving you thousands of dollars in interest and shortening the amount of time it takes to pay off your mortgage. If you choose an accelerated payment plan, not only are you paying more frequently, but you’re making extra payments over the course of the year. The following table shows how a $1,000 per month mortgage payment is managed with different payment schedules.

Option Formula Payments per year Amount per payment Total paid per year
Monthly $1,000 ÷ 1 12 $1,000 Paid once per month $12,000
Semi-monthly $1,000 ÷ 2 26 $500 Paid twice per month $12,000
Bi-weekly (non-accelerated) $1,000 x 12÷ 26 26 $461.54 Paid every second week $12,000
Weekly (non-accelerated) $1,000 x 12÷ 26 52 $230.77 Paid every week $12,000
Bi-weekly (accelerated) $1,000 ÷ 2 26 $500 Paid every second week $13,000
Weekly (accelerated) $1,000 ÷ 2 52 $250 Paid every week $13,000

Monthly payments
Your payment is taken from your account on a specific day each month. You make 12 payments a year.

Semi-monthly payments
Your monthly payment is paid in two equal instalments each month (e.g., on the 1st and 15th of every month). You make 24 payments a year.

Bi-weekly payments (non-accelerated)
Your payment is made every 14 days (i.e., every second week). Because there are 52 weeks in a year, you make 26 payments. The payment amount is calculated by multiplying your monthly payment by 12 and dividing it by 26.

Weekly payments (non-accelerated)
Your payment is made every seven days (i.e., every week). Because there are 52 weeks in a year, you make 52 payments. The payment amount is calculated by multiplying your monthly payment by 12 and dividing it by 52.

Accelerated bi-weekly payments
Your payment is made every 14 days (i.e., every second week). Because there are 52 weeks in a year, you make 26 payments. The payment amount is calculated by dividing your monthly payment in half and paying that amount every two weeks. This results in making the equivalent of one extra monthly payment every year.

Accelerated weekly payments
Your payment is made every seven days (i.e., every week). Because there are 52 weeks in a year, you make 52 payments. The payment amount is calculated by dividing your monthly payment by four and paying that amount every week. This results in making the equivalent of one extra monthly payment every year.

Summary
Weekly and bi-weekly accelerated payment plans save you the most money because you are making the equivalent of an additional payment each year. The faster you pay off your principal, the less interest you will pay.

Comments

comments