A big question that eventually comes up with any mortgage is how to handle paying it off. Most lenders will give you a variety of options when it comes to the frequency at which you can make payments. Each of these options have a few pros and cons and are sometimes dependent on your other financial goals. Let's look at these payment options and see which one is most suitable for you.
Types of Mortgage Payment Frequency
Monthly Mortgage Payments
A monthly mortgage payment is the most common payment option that lenders provide and the standard by which all other payment options are measured against. With this option, your mortgage payment is withdrawn from your account once a month -- twelve times per year.
Semi-Monthly Mortgage Payments
The semi-monthly mortgage payment option is a simple variation of the monthly payment option. Instead of the payment occurring on a monthly basis, the amount owing is simply divided into two separate payments.
To calculate your semi-monthly payments, simply multiply your monthly payments by 12 and then divide that amount by 24 pay periods. The total amount paid within a calendar year will be equal to what you pay with a monthly payment option.
Bi-Weekly Mortgage Payments
A bi-weekly payment option is calculated by taking your monthly payment amount, multiplying it by 12 months, but then dividing it by 26 pay periods (half of 52 weeks in a year). Again, the total payment amount within a calendar year will be the same as the monthly payment option.
Weekly Mortgage Payments
Similar to the bi-weekly payment option, weekly payments are calculated by multiplying your monthly payment amount by 12, but then dividing that amount by 52 pay periods. The total amount paid within a calendar year will again be the same as the monthly payment amount.
Bi-Weekly Accelerated Mortgage Payments
Bi-weekly accelerated mortgage payments are calculated slightly differently than bi-weekly payments. Instead of multiplying your monthly payment by 12 and then dividing it by 26, you will divide your monthly payment by 2 and then multiply it by 26. This gives you a slightly larger monthly payment but it is advantageous in that it accelerates the amount of time in which your mortgage will be paid down. It's also worth noting that with accelerated payments, over the long haul you will direct more of your payment toward principal than interest.
Weekly Accelerated Mortgage Payments
Weekly accelerated mortgage payments are calculated in the same manner as bi-weekly accelerated payments. Instead of multiplying the monthly payment and dividing it by the pay period, you first divide your monthly payment and then multiply it by the pay period -- in this case 52 weeks. Again, this gives you a slightly higher payment amount than weekly payments, but the advantage is in paying down your mortgage quicker and having more of your money directed toward the principal amount owing.
Which Mortgage Frequency Should You Choose?
Deciding which mortgage payment option is best for you depends on a number of factors that might vary from person to person. For the most part, monthly, semi-monthly, bi-weekly and weekly payment options are the same over a big picture 25 year amortization period. What it comes down to is what you are comfortable with in terms of your personal cash flow on a monthly basis.
If you are comfortable with a large mortgage payment coming out all at once on the 1st day of the month, the monthly payment option might be fine for you. However, if you get paid semi-monthly and if your cashflow is tight, you might want your mortgage payment divided into smaller amounts -- semi-monthly, bi-weekly or even weekly.
What's notable and advantageous about the accelerated mortgage payment options (both bi-weekly and weekly) is that you can actually pay down your mortgage quicker and with less interest. By dividing your monthly payment first and then multiplying it by the desired pay period frequency, your payments are slightly higher which will accelerate how quickly you pay down your mortgage. This is obviously advantageous if you indeed want to pay down your mortgage quicker and if you can handle the slightly higher mortgage payments.
That said, not everyone can manage both extra and increased mortgage payments. Many people would rather opt for consistency within their financial means.
Additionally, some people might not see paying down a mortgage as their primary financial goal. For some, investing and seeing a bigger return on investment than the interest rate they are trying to eliminate is the best approach. This can be especially advantageous when mortgage interest rates are low. This obviously comes with risk too though and should be carefully thought out.
As it is with many things related to mortgages, it's best to take your time and be calculated in your decision making. Having a trusted advisor or a mortgage broker is always helpful too. If you are looking for consultation of any kind, we are happy to help you out.