Hey everybody, Aleem here – Mortgage Broker Vancouver!
Today I’d like to discuss bi-weekly mortgage payments and how you can use them to help pay your mortgage down faster.
This topic was inspired by a conversation I had with a client this past week, and I think that looking at a simple illustration will help understand the principles behind bi-weekly payment frequency.
Most people think that there is some sort of trick behind making more frequent payments, but actually the concept is pretty simple; with accelerated bi-weekly mortgage payments you are paying more money towards your mortgage, and that extra money is going straight towards your principal balance.
Let’s say your mortgage payment is a thousand dollars a month. You would pay $1,000 12 times so 12,000 dollars over the course of the year.
If you are pay bi-weekly accelerated payments, basically you take your monthly payment and cut it in half. $500 dollars every two weeks.
The important question is if monthly payments amount to 12 payments a year, then how many times in one year do bi-weekly mortgage payments amount to. You’re probably thinking, that’s pretty simple, just take the 12 payments from the monthly frequency and double them.
Well, there are 26 bi-weekly mortgage payments in the year NOT 24, which is where the confusion lies for most people.
It is not unlike most of our salaried clients’ pay periods. If you are on a bi-weekly pay period, you are used to getting a cheque every couple of weeks but there are two months every year where you receive an extra paycheque.
Back to our illustration. So then if there are 26 pay periods in the bi-weekly payment structure, that is 26 times 500 which gives us 13,000.
In actuality you are paying 1,000 dollars more, or one full extra payment per year. That has an effect of shaving several years off of the life of your mortgage. Depending on your amortization schedule, it can cut 4 to 7 years right off the top.
If you would like more information on how to pay down your mortgage ASAP, or know anyone that might, feel free to give me a call.
I’m Aleem Peermohamed – Mortgage Broker Canada.
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