Once you are approved for a mortgage, your lender’s representative will ask you for your payment frequency preference. Sadly, once yearly is not on the list. You can pay:
Many of our clients choose bi-weekly – I think because they read somewhere that is the best repayment strategy — fully believing this will pay the whole she-bang off faster and with much less interest over time. Not so folks.
Lesson: don’t believe everything you read in Maxim magazine!
Here is where I bust the bi-weekly mortgage myth wide open. Bi-weekly payments (and weekly payments) may make no difference to the long run of your mortgage. What?! No difference?!
Let me explain…
To get the sizzle in your bi-weekly payment, you have to request accelerated bi-weekly payments. No, accelerated does not mean a mortgage at crazy-scary warp pay-off speed. Stay with me here. Accelerated means you divide the normal monthly payment by two and pay that every two weeks.
Lenders typically offer either bi-weekly payments or accelerated bi-weekly payments.
Now, are you sitting down, because here comes the even bigger myth-busting truths… yes, myths plural… cause there is more than one:
BI-WEEKLY PAYMENTS DO NOT SHORTEN THE AMORTIZATION PERIOD
BI-WEEKLY PAYMENTS DO NOT REDUCE THE AMOUNT OF INTEREST
BI-WEEKLY PAYMENTS DO NOT INCREASE THE AMOUNT OF PRINCIPAL BEING REPAID
They serve as a convenience, not a money saving tool. Whoah! Good to know, right?!
Accelerated bi-weekly payments on the other hand do all of those things. They shorten the amortization period, reduce the amount of interest paid over time, and even pay back principal faster. They are both a convenience AND a money saver. So basically accelerated bi-weekly payments are your budgetary BFF.
Yep, here it comes… the math!
Let’s suppose your monthly mortgage payment would be $1,500. Over the course of a year (twelve months) you would repay your lender $18,000.
Then, suppose you said you want bi-weekly payments…
Your payment would be $692.31 every two weeks. Over the course of the year you will make that payment 26 times and repay the lender $18,000.
No difference whatsoever.
Now, if you really want to pay down your mortgage aggressively using bi-weekly payments, simply take your monthly payment and divide it by two, and repay $750 every two weeks.
Over the course of the year you will repay $19,500 — which is 1,500 more beautiful dollars than your neighbour who just chose simple bi-weekly payments. Over time this can really add up and yes, you will truly be one of the cool kids on the block, by making accelerated bi-weekly mortgage payments.And that my friends is the accelerated payment!
But please resist the urge to tell him he’s a mortgage moron. Instead why not pay forward this intel. Shout it from the mountain tops in fact. Because, with you on my team we can bust this bi-weekly mortgage myth wide open!