Payment Strategy – Payment Frequency
How you pay your mortgage is perhaps the most overlooked savings tool. By establishing an effective payment strategy, you can save tens of thousands of dollars during the course of your loan and become mortgage free years sooner.
Most lenders will allow you to make your mortgage payments at intervals that suit your needs and preferences.
The following payment frequencies are typically offered: Monthly, Semi-Monthly, Bi-Weekly, Bi-Weekly Accelerated. Weekly and Weekly Accelerated/
Convenience is the starting point when choosing your payment frequency, but there is much to be said for paying more frequently. When you increase the payment frequency (beyond a monthly payment) you reduce the principal faster, pay less interest and pay off your mortgage sooner.
To understand the benefits and drawbacks of the different payment frequencies, let’s take a look at each in more detail:
Monthly Payments
The most common way of paying a mortgage is with monthly payments – one mortgage payment once per month. The drawback with monthly payments is simply because they occur once a month, there is more time in-between payments for interest to accrue.
Semi-Monthly Payments
Semi-monthly payments are also pretty straight forward. They’re taken twice a month, usually on the 1st and the 15th of each month with each payment being one half of the monthly amount.
So, whether you pay $1,000 in monthly payments or $500 in semi-monthly payments, you’re still paying $12,000 per year. As a result, this option saves you very little money because you are paying the same annual amount just a smaller portion more frequently.
Bi-Weekly Payments
Again, we’re not looking at much of a money savings here. Bi-weekly payments are determined by multiplying the monthly payment by 12 and then dividing by 26. So in our $1,000/month example, the biweekly payment ends up being $461.54 – totalling $12,000 per year.
A small amount of savings are gained due to half of your payment being made early each month. The main reason for choosing this option would be the convenience of matching your payment to your pay days, with lower payments than the accelerated version.
Bi-Weekly Accelerated Payments
If you’re hoping to pay your principle off faster, this is the way to go. Payments are exactly half of a monthly payment amount and collected every two weeks – meaning exactly every 14 days. For example, if the monthly payment is $1,000 then the bi-weekly payment will be $500. This saves you money because you pay an extra $1,000 directly to the principle over a twelve month period. Reducing the overall amount of interest you pay through the term of your mortgage.
Please note that at least twice a year you will have three payments in the month. This results in an extra two payments per year and, in our $1,000/month example, that results in $13,000 per year, rather than $12,000.
This is an easy payment plan to keep up with if you receive a paycheque every two weeks. If you are paid monthly, or semi-monthly (the 1st and 15th of every month), bi-weekly payments can be difficult because of the extra payments twice per year.
Weekly Payments
Regular weekly payments don’t make much of a difference in terms of cost savings. The $1,000 monthly payment is multiplied by 12, and then divided by 52. This equals a weekly payment of $230.77 and no surprise, at the end of the year you will have ended up paying $12,000. Again, using our example, this is exactly the same amount as monthly.
A very small amount of savings are gained due to three quarters of your payment being made early each month. The main reason for choosing this option would be the convenience of matching your payment to your pay days, with lower payments than the accelerated version.
Weekly Accelerated Payments
Similar to bi-weekly accelerated payments, weekly accelerated payments allow you to pay off your mortgage faster by sneaking in a few extra payments. They are one quarter of your normal monthly payment, but they’re made exactly every seven days so you end up making four extra payments per year. In our example, that results in an extra $1,000.