Sometimes it seems to be the small details which cause the most confusion.
This week we are going to take a quick look at mortgage payment frequencies to clear this up once and for all.
Your mortgage payment is made up of two portions. There is a part which goes to the principal and a part which goes to the interest.
The only time this is not the case is if you have opted to go with a Home Equity Line of Credit also commonly referred to as a HELOC.
With a HELOC you are only required to pay the interest portion. That can seem nice but it is important to realize that if all you ever pay is the interest, you will owe the bank indefinitely.
There are a number of ways you can pay your mortgage.
Let’s look at each for a $300,000 mortgage so you can see the precise differences. These number are based on a 25-year amortization and a five-year term with a rate of 3.19%.
1. Monthly – this one is pretty self-explanatory. The mortgage principal and interest payment will be taken from your account on the same day each and every month. On the same day of each month you pay $1,449.14
2. Semi-monthly – this payment frequency is twice a month. You will set the dates in advance.
On the same two days you pay $724.57.
3. Bi-weekly – people who are paid every two weeks often opt for this frequency as it allows them to align this payment to the payday.
Every other Friday, for example, you would pay $668.84
4. Weekly – this is also fairly self-explanatory. On the same day of the each week you will pay $334.42.
There is a very common misconception that choosing the weekly or bi-weekly payment will pay your mortgage down more quickly but this is not actually the case. If your goal is to pay down your mortgage faster, without actively putting lump sums down, then you must choose the accelerated frequency.
5. Bi-weekly accelerated – this is the same as above where every two weeks the payment comes out but with the accelerated option you are paying $724.57 with the extra funds being directly applied to the principle. Your overall mortgage goes from 25 years to 22.4.
6. Weekly accelerated – also the same as above but the payment goes to $362.29 a week and the mortgage takes the same overall drop from 25 to 22.4 years.
Every mortgage lender is different with their guidelines so please take the time to ensure you have been put into the frequency you actually wanted.
The other regular ongoing costs associated with home ownership are:
1. Property taxes – can be included with your mortgage and will be divided into monthly, semimonthly, biweekly or weekly segments.
2. Home insurance
3. Life, disability, and critical illness insurance
And there you have it. Mortgage payment frequency fully explained for the average consumer like me.
Pam Pikkert is a mortgage broker with Mortgage Alliance – Regional Mortgage Group in Red Deer.