A lot of people go into a mortgage and will select a bi-weekly option to match up with their pay periods. This makes it very easy, come payday your pay goes in, your mortgage comes out. The question is, are you on the right bi-weekly plan?
It’s example time again. The average home price in Red Deer today is $306,000. Lets say we bought this average home for $306,000 and put our minimum down payment of 5% which is $15,300. After we add our mortgage insurance to the mortgage, so we start out our mortgage at $299,857.05.
To make this easy lets say our mortgage is $300,000. If we amortize this over 35 years (maximum) and sign a 5 year term at 4.5%. This would make our monthly payment $1419.77.
So, Would a regular bi-weekly payment pay off your mortgage sooner than sticking with the monthly payment. Keeping this payment as a monthly payment obviously will take the full 35 years to payoff. Changing it to bi-weekly will pay your home off in …… 35 years. The change does very little. Changing it to a rapid or accelerated bi-weekly payment will have your home paid off in a little over 29 years.
So, Whats the difference?
To get a regular bi-weekly payment they take the monthly payment, in this case $1419.77, and multiply it by 12 to get the true annual payment of $17,037.24. Then they take the annual payment and divide it by 26 to get a true bi-weekly payment of $655.28. so you can see you are not changing anything from your monthly payment. The amount you pay annually is still the same.
For a rapid bi-weekly payment, they take your monthly payment and simply divide it in half. This makes our new rapid bi-weekly payment $709.89.
When you do any bi-weekly payments there will be 2 months of the year that you will have 3 payments come out for your mortgage. These months will change depending on the payment dates you pick.
This difference of the two bi-weekly payments $54.61 or $1419.73 per year is coming off your principle, with none of it going to interest. So when the year is done on a rapid payment you have paid equal to 13 months payments over a 12 month period. For the extra $55 per month, you can save yourself close to 6 years of payments.
Lets look at this in even a greater picture and look at the ugly truth about a mortgage. Making your monthly or regular bi-weekly payments on your mortgage, the total interest you have paid over the 35 years is $296,303.48. This is equal to an average of $705.48 in interest per month.
Going with the rapid bi-weekly payment for the entire amortization, this same mortgage over the 29 years it took to pay off is $237,704.58. Equal to $260.36 per bi-weekly payment.
So when all is said and done by simply changing from a monthly or regular bi-weekly payment not only did you just save yourself 5 years of mortgage payments. You have also saved yourself $58,598.90 in interest.
If bi-weekly options are not something that works for you, you can also increase your payments. All you would have to do to make your monthly payment equal to the rapid bi-weekly is add difference to the monthly mortgage. Take your monthly payment and divide it by 12, That is the amount to add to your monthly payment.
Make sure when you sign up for a mortgage, you are getting all the information that you need to make the right choice for YOU, not the bank.
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Thanks for reading
Scott Bourke, AMP
Regional Mortgage Corporation
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