Most lenders offer different payment options on your mortgage loan such as: Monthly, bi-weekly, semi-monthly, weekly, accelerated bi-weekly or accelerated weekly. This allows the you to choose a repayment frequency that fits with your 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 in terms of savings and the length of time it takes to pay off the mortgage loan.
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 two 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. Choosing regular bi-weekly or regular weekly payments has the same effect as paying a monthly payment. If you are looking to pay off your mortgage quicker and reduce your amortization you must request accelerated bi-weekly or accelerated weekly payments.
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.
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. When choosing your next mortgage, we would be happy to assist you with reviewing the payment options that fit with your financial goals and lifestyle.
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)
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