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.

Monthly Payments

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).

Bi-Weekly Payments

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.

Weekly Payments

A weekly payment is your annual mortgage payment divided by 52, so our $12,000 annual payment becomes $230 ($12,000 / 52).

An Example

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:

Payment Type

Payment Amount

Annual Payment

Time to Pay Off

Total Interest Paid

Total Cost of Home

Monthly

$1,000

$12,000

20 years

$60,668.24

$300,666.44

Bi-Weekly

$461.22

$12,000

20 years

$60,503.66

$300,337.26

Accelerated Bi-Weekly

$500

$13,000

18 years

$53,737.39

$286,804.70

Weekly

$230.54

$12,000

20 years

$60,433.18

$300,196.38

Conclusion

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.