Mortgage Payment Options Explained
We just finished discussing types of mortgages, now let’s talk about payment options.
Typically, mortgage payment options look like this:
- Monthly Payments
- Bi-Weekly Payments
- Accelerated Bi-Weekly Payments
- Weekly Payments
Let’s go through and explain all of these, then we’ll talk about which are better for you.
This one is pretty straight-forward. Every month (probably on the same day), you’ll make a mortgage payment. If your mortgage payment ends up being $1,000, you’ll pay that $1,000 each and every month, probably on the 1st. This means your annual mortgage payment will be $12,000 ($1,000 x 12 months).
With bi-weekly you’ll make a payment every two weeks, probably the 1st and 15th. The payment is usually calculated by taking your annual payment and dividing by the number of 2-week periods in the year, which is 26. So if your annual payment was $12,000, your 2-week payment would be $461.22 ($12,000 / 26).
Accelerated Bi-Weekly Payments
Here’s where things get interesting. With the accelerated option, you’ll pay half of your monthly payment every 2 weeks. That sounds very similar to the bi-weekly option, but it’s actually very different.
Here’s where the magic happens: using our $1,000 example, you’d pay half of $1,000, $500, every two weeks, which is $13,000 ($500 x 26 2-week periods) a year. That’s an extra $1,000 on your mortgage every year, which really accelerates your payment.
A weekly payment is your annual mortgage payment divided by 52, so our $12,000 annual payment becomes $230 ($12,000 / 52).
Let’s use a hypothetical example to see how this plays out over time. You just bought a house for $179,330 at an interest rate of 3.08% on a 20 year amortization period (we’re using these slightly wonky numbers to come up with a nice even monthly payment).
Let’s see how this works for each of our payment options:
Time to Pay Off
Total Interest Paid
Total Cost of Home
You can see that for three of our options the difference is very minimal. From Weekly to Monthly, we’re talking about less than a $500 difference over 20 years. So your only real consideration for these would be cash-flow. If you find it easier to handle smaller weekly payments vs. larger monthly ones then this might be a better option.
But the clear winner is the accelerated bi-weekly payment. By bumping your total annual payment up by only $1,000 you can pay off this home 2 years sooner and save almost $7,000 in interest. And that’s for a relatively cheap home!
If you buy a $400,000 home (not uncommon in major cities), you’re looking at a difference of a total cost of $670,644.02 (monthly payment) vs. $639,725.20 (accelerated bi-weekly), a difference of over $30,000!
The choice is clear: accelerated bi-weekly is the way to go.