So you’ve been approved for your mortgage, and have chosen your term and amortization. Now it’s time to pick your payment frequency; monthly, semi-monthly, weekly or bi-weekly. Most people are aware that there are advantages to paying your mortgage on a bi-weekly basis, but aren’t quite sure why.
One perception is that by paying bi-weekly you are making more frequent payments so less interest will accumulate. While this is true, the savings are minimal. On a $200,000 mortgage at 3.50% you can expect to save about $0.12 over a 5 year term. This example assumes that instead of making a $1,000 monthly payment you make a $461.18 bi-weekly payment.
The magic of bi-weekly mortgage payments is when you choose the bi-weekly accelerated option which in this case is $500. By paying $500 bi-weekly you make $13,000 in mortgage payments per year as opposed to $12,000 with the $1,000 monthly payment. With the bi-weekly accelerated option your balance would be $5,507.18 less at the end of 5 years which means you paid $507.18 less in interest. As you can see the big difference is the extra principal you’re paying. The real pay-off is that you’ll knock off almost 3 years of mortgage payments from the end of your mortgage or about $35,000 in our example.
This strategy works particularly well if you receive a bi-weekly pay-cheque. You can synchronize your mortgage payments to come out the same day that your pay is deposited. If your income is less regular and you’re afraid of committing to bi-weekly mortgage payments then you can still reap similar benefits by making an extra monthly mortgage payment each year on the anniversary date of your mortgage.