One of the most significant financial commitments you will make is a mortgage. It can also be one of the longest-lasting. When choosing your payment frequency, there are several options available, and understanding them can help you manage your cash flow and reduce the amount of interest you pay over the life of your mortgage.
Monthly Payments
The most common payment frequency is monthly payments. With this frequency, you make a single large payment, paid once per month. A 25-year mortgage, paid monthly, will take 25 years to pay off but includes the added burden of one larger payment coming from one employment pay period. While it is the default payment schedule that sets your amortization, it does not offer any term savings or amortization savings.
Bi-Weekly Payments
Bi-weekly payments are a popular payment frequency. With this payment schedule, you make 26 payments per year, calculated by multiplying your monthly mortgage payment by 12 months and dividing by the 26 pay periods. Opting for bi-weekly payments can save you term savings of $177 and total amortization savings of $1,769 for a $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization.
Accelerated Bi-Weekly Payments
An accelerated bi-weekly payment schedule offers 26 payments per year, but the payment amount is higher than a regular bi-weekly payment frequency. Opting for an accelerated bi-weekly payment will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage. This frequency also allows the mortgage payment to be split up into smaller payments vs a single, larger payment per month. This is especially ideal for households who get paid every two weeks as the reduction in cash flow is more on track with incoming income. For a $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization, accelerated bi-weekly payments of $2,078.10 will save you term savings of $1,217 and total amortization savings of $145,184. Plus, you would save 4 years, 12 months of payments by reducing scheduled amortization.
Weekly Payments
With weekly payments, you make 52 payments a year on your mortgage. This frequency is similar to monthly payments, and the calculation is based on multiplying your monthly mortgage payment by 12 months and dividing by 52 weeks in a year. For a $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization, weekly payments of $957.50 will save you term savings of $253 and total amortization savings of $2,526. You can move to accelerated weekly payments to save even more!
Prepayment Privileges
Most mortgage products include prepayment privileges that enable you to pay up to 20% of the principal per calendar year. By exercising your prepayment privileges, you can take time off your mortgage. For instance, an extra $50 bi-weekly is $32,883 total savings and an additional 1 year, 2 months time saved. An extra $100 bi-weekly is $62,100 in total savings and an additional 2 years, 3 months time saved on your mortgage. An extra $200 bi-weekly is $111,850 in total savings and an additional 4 years, 1 month of time saved on your mortgage.
Choosing the Ideal Payment Frequency
Choosing the ideal payment frequency will depend on your personal circumstances and financial goals. Understanding the different payment frequencies can be key in managing your monthly cash flow. If you’re struggling to meet a large payment, breaking it up can be effective, while the same can be true of the opposite. Individuals struggling to make a smaller payment more often may opt to keep monthly payments depending on how they are paid.
It is best we discuss which is best for you and your individual situation.