Once your mortgage is approved you will be asked to sign a mortgage commitment letter that outlines the details of your loan and the repayment schedule. Most lenders offer a variety of different payment options such as monthly, bi-weekly, semi-monthly, weekly, accelerated bi-weekly or accelerated weekly. This allows the borrower to choose a repayment frequency that fits with their financial goals and their lifestyle. If paying off your mortgage as quickly as possible is one of your goals it is important that you understand the difference between regular and accelerated payment options.
If you choose a regular monthly mortgage payment, then your payment is made on the same day of every month and you will make 12 payments a year. Regular bi-weekly mortgage payments have become very popular as they match people’s payroll (i.e. every 2 weeks). The lender will take your monthly mortgage payment, multiple it by 12 months and divide by 26 pay periods in a year. With a semi-monthly schedule, the monthly mortgage payment is divided in half and two payments are made each month: 24 half payments per year. Weekly payments are calculated by multiplying your mortgage payment by 12 months and then dividing by 52 weeks in a year. With a weekly mortgage payment you will make 52 payments per year.
An accelerated bi-weekly payment is calculated by dividing the monthly payment by two and paying that amount every two weeks (26 payments per year), so you are in effect paying the lender the equivalent of 13 months of payments instead of 12 payments. With an accelerated weekly payment, the monthly payment is divided by four (weekly) and that amount is paid each week. You will still make 52 payments per year but the payment is slightly more than a regular weekly mortgage amount.
The effect of an accelerated biweekly or weekly payment is that the borrower is paying down the principal faster and paying less interest, which also reduces the amortization period. Choosing accelerated bi-weekly payments instead of monthly would save you interest costs and reduce 2.4 years off the life of your mortgage.
If increasing your payment at the time of funding is not an option or is not right for you, keep in mind that at a later date you can increase your payment or make an extra payment (as per your Lender’s guidelines) which will pay off more of the principal and accelerate the repayment of the mortgage loan.
Of Prime Interest is a collaboration of mortgage professionals and we welcome your questions. Trish Balaberde (250-470-8324) , Darwyn Sloat (250 -718-4118) and Christine Hawkins (250-826-2001).