When it comes to mortgages, with so many terms, payments, numbers and percentages it can sometimes be tough to break through the noise. Do you ever wonder if there is really a simple way that you can save money and pay your mortgage off faster? One of the best and easiest changes you can make is looking at your payment type.
It is so easy to be overwhelmed by all of the payment options, and you may be in this position yourself. According to the number of questions I receive on a regular basis, you are definitely NOT alone.
So, what are the different payment types? What really is the difference between "bi-weekly" and "accelerated bi-weekly"?
When you first get set up with your mortgage, you will likely have an option to choose one of 6 different payment intervals, they will be:
- Monthly (12 payments per year)
- Semi-Monthly (24 payments per year)
- Bi-Weekly (26 payments per year)
- Weekly (52 payments per year)
- Accelerated Bi-Weekly (26 payments per year)
- Accelerated Weekly (52 payments for year)
The first four are all essentially the same payment amount, just broken up to fit with your preferred payment date.
The most popular options are Monthly, Bi-Weekly and Accelerated Bi-Weekly, so let's compare those three payments with the following example:
- $300,000 - Average Greater Vancouver Mortgage
- 25 Years amortization - Most popular length
- 2.89% - Example of a "no frills" 5 year interest rate
Based on this scenario your monthly payment would be $1403. If you were to choose a bi-weekly payment you would multiply this by 12 months and divide the total by 26 (52 weeks in a year). This would give you a payment of $647 every 14 days, the advantage here is that it's less than half of your monthly payment and aligns well with your paycheque.
The accelerated bi-weekly payment differs in the fact that you divide the monthly payment in half so $741 (less than $100 more) and you continue to make 26 payments per year. For you this means larger reduction of the principal loan, and less towards payment towards interest of your mortgage.
In this scenario you would save $15,000 in unnecessary interest costs and pay off your mortgage nearly 4 years quicker than the other options over the life of your mortgage!
This is just one tip that can save you thousands, if you would like help with getting this payment in place or would like to learn other money saving strategies, please give me a call or send me an e-mail.