I get confused requests a lot of the time with people wanting bi-weekly payments, but they aren’t sure why. They’ve just been told by friends and family that it speeds up your mortgage. This video blog explains exactly why. Enjoy!
Transcript of Video Blog:
Hey, everybody, it’s Rowan Smith with the Mortgage Centre. A lot of people are under the misconception that paying bi-weekly unto itself makes your mortgage go away faster. That’s not true. I just want to explain very briefly why bi-weekly payments, why in fact bi-weekly accelerated payments, make your mortgage go away faster.
If your payment is $1,000 a month – we’ll keep the numbers nice and round here. Most people think, OK, bi-weekly is therefore $500 every two weeks. And they’re correct. However, how many bi-weekly periods are there in a year? The answer is 26. So you’re actually making one full extra monthly payment spread out over the course of your year.
If you’ve ever had that experience of being a bi-weekly paid employee, and twice a year you get a paycheck that doesn’t have rent or a mortgage payment waiting for you, that’s why it works. Because you are in fact paying more.
Now if somebody says to you, “I want to pay semi-monthly. I want to pay $500 on the first and $500 on the 15th, ” or whatever their pay stubs say, you can do that but that doesn’t accelerate the payments at all because that’s still only 24 payments of $500.
In order to get that benefit, speeding up your mortgage, you have to make what we call bi-weekly accelerated. That’s taking the number of your payments – so, $1,000 divided by two, that finds what the halfway point is, that’s $500. Figuring that out times 26, and you’ll find out what your annual actual payments are going to be.
You’ll find out that’s exactly one payment more than if you had just been paying monthly. But that one payment can shave many years off your mortgage. That’s the way I pay mortgages and that’s the way I recommend everybody pay them.
For the Mortgage Centre, I’m Rowan Smith.