Accelerate Your Mortgage Repayment: Choosing the Ideal Payment Schedule
Your mortgage payment schedule consists of two important criteria’s. The first criteria is frequency; and the second being accelerated or non-accelerated. This is one of the most overlooked tools you have at your disposal. These tools will not only help you with your monthly cash flow but will also assist you with your mortgage repayment. The more frequently you pay your mortgage, the quicker you can pay it off! Many people don’t understand the difference between non-accelerated payments and accelerated payments. Below is a quick overview of what each of these payment frequencies mean.
A monthly payment is a single large payment, paid once per month. This is usually the default set on your mortgage approval. Paying monthly may be a convenient way to pay your mortgage if you get paid once-per month or are used-to budgeting for a monthly rent payment. Most mortgages have excellent pre-payment options so don’t think if you pay your mortgage only once per month you can’t accelerate the principal pay down on your mortgage. You can choose whatever time of month you pay your mortgage, and it doesn’t need to be on the first day. The interest adjustment date helps us set the actual day of the month you’d like to make your mortgage payment.
A bi-weekly mortgage payment is a total of 26 payments per year, calculated by multiplying your monthly mortgage payment by 12 months and divided by the 26 pay periods. People often choose this payment schedule if they get paid bi-weekly but want lower payments than the accelerated option (which is described later). There is also a little savings on bi-weekly payments as it can help you pay down on the principle, just a little faster.
Example: A $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have a bi-weekly payment of $1,915.98 with term savings of $177 and total amortization savings of $1,769.
Accelerated Bi-Weekly Payments
An accelerated bi-weekly mortgage payment is also 26 payments per year, but the payment amount is higher than a regular bi-weekly payment frequency. Opting for an accelerated bi-weekly payment will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the entire term of your mortgage, since you’re paying less interest. This frequency also allows the mortgage payment to be split up into smaller payments versus a single, larger payment per month.
Example: $750k mortgage, 3-year fixed rate, 5.34%, 30-year amortization you would have accelerated bi-weekly payments of $2,078.10 with term savings of $1,217 and total amortization savings of $145,184. Plus, you would save 4 years, 12 months of payments by reducing scheduled amortization.
Weekly payments can also be made in an accelerated or non-accelerated schedule!
In addition to fine-tuning your payment schedule, most mortgage products include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This can help reduce your amortization period (the length of your mortgage).
By exercising your prepayment privileges, you can take time off your mortgage. For instance:
- Extra $50 bi-weekly is $32,883 total savings and an additional 1 year, 2 months time saved on your mortgage
- Extra $100 bi-weekly is $62,100 in total savings and an additional 2 years, 3 months time saved on your mortgage
- Extra $200 bi-weekly is $111,850 in total savings and an additional 4 years, 1 month of time saved on your mortgage
By understanding the different payment schedules you’ll improve your monthly cash flow and pay your mortgage off faster. Not sure what payment schedule suits you the best or want a second opinion? We’re here to help! Just contact us today and schedule an appointment with one of our mortgage professionals!
P.S. – Here’s a great mortgage app tool that helps you calculate the mortgage payments, but we’re here to offer personalized advice so please reach out to us today!