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.
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.