One of the most important things that we discuss with our clients prior to closing is how they want their payments to come out of their account for their mortgage payment. It’s always simple and easy when a client gets paid bi-weekly, however it’s a total different story when someone gets paid monthly or 1st & 15th. I can relate to this, as I too only get paid twice a month and have tried going bi-weekly “accelerated” in the past and with all honesty even though I always keep money in my account it still drove me crazy to not know when a mortgage payment is coming out of my account.
Needless to say everyone knows that paying a mortgage bi-weekly accelerated saves them not only thousands of dollars in interest (depending on the mortgage size) but also can reduce approx 5 years off of their mortgage. Most clients when shown the savings would like to save the money and years of interest but in reality more and more employers are paying twice a month.. Well we’ve got the answer for you…
Accelerated semi-monthly…. Let’s use a $200,000.00 mortgage at today’s 3.49% 5 year rate and a amortization of 35 years as an example, monthly this payment is $822.52, a bi-weekly payment would equal exactly HALF the monthly payment but paid every 2nd Friday (equals 26 payments per year) $411.26 bi-weekly, now it doesn’t take a rocket scientist to figure this out, but if you make this payment 26 times you’re effectively making an extra $822.52 towards your principal.
Now if you wanted to pay semi-monthly but wanted to accelerated the payments you would simply divide the $822.52 (paid extra) by 24 (semi-monthly payments) and add that to your already $411.26 payments making your payments a slightly higher $445.53 and you are effectively doing the EXACT same thing as bi-weekly accelerated, or pretty damn close.. look at the numbers..
- 200K @ 3.49% over 35 years and payments of $411.26 bi-weekly accelerated = $179,443.97 at the end of 5 years.
- 200K @ 3.49% over 35 years and payments of $445.53 semi –monthly = $179,447.37 at the end of 5 years.
o Total difference equals $3.40 over 5 years.. .68 cents a year..
The best thing about this is that you are accomplishing the same things as the bi-weekly payer, however fitting it into your pay periods…
Any questions about this I welcome them and look forward to your comments.