Difference between bi-weekly and rapid bi-weekly mortgages

By Scott Bourke

A lot of people go into a mortgage and will select a bi-weekly option to match up with their pay periods. This makes it very easy, come payday – your pay goes in, your mortgage payment comes out. The question is, are you on the right bi-weekly plan?

To make this easy let’s say we just got a mortgage for $300,000. If we amortized this over 25 years (maximum as an insured mortgage) and sign a five-year term at 3.5%. This would make our monthly payment $1,497.81.

Keeping this payment as a monthly payment obviously it will take the full 25 years to completely pay off the mortgage. So, would a regular bi-weekly payment pay off your mortgage sooner than sticking with the monthly payment? Changing your monthly payment to a regular bi-weekly payment will pay your home off in 25 years. That change does very little. Changing it to a rapid or accelerated bi-weekly payment will have your home paid off in just a little over 22 years.

So, what is the difference?

To get a regular bi-weekly payment the lenders take the monthly payment, in this case $1,497.81, and multiply it by 12 to get the true annual payment of $17,973.72. Then they take the annual payment and divide it by 26 to get a true bi-weekly payment of $691.30. So you can see you are not changing anything from your monthly payment. The amount you pay annually is still the same.

For a rapid bi-weekly payment, they take your monthly payment and simply divide it in half. This makes our monthly payment of $1,497.81 a new rapid bi-weekly payment of $748.91. This makes for a monthly difference of $57.61 between the two bi-weekly options. Multiply that number by 26 (each bi-weekly payment) and you get $1,497.86 annually. You will notice that over a year that is equal to just five cents more than a regular monthly payment. When the year is done on a rapid payment you have paid equal to 13 months payments over a 12 month period. This difference of the two bi-weekly payments, $57.61 per payment or $1,497.81 per year, is coming right off your principle with none of it going to interest. For the extra $58 per month, you can save yourself close to three years of mortgage payments.

Let’s look at this in even a greater picture and look at the ugly truth about a mortgage. Making your monthly or regular bi-weekly payments on your mortgage, the total interest you have paid over the 25 years is $149,343.48. Going with the rapid bi-weekly payment for the entire amortization, with this same mortgage we paid $129,636.13 in interest.

So when all is said and done simply by changing from a monthly or regular bi-weekly payment to a rapid or accelerated bi-weekly payment not only did you just save yourself three years of mortgage payments. You have also saved yourself close to $20,000 in interest.

Keep in mind, if you get paid in a bi-weekly structure I’m sure you are aware that there are two months a year that you will actually get paid three times during the month. Mortgage payments work the same way. When you do bi-weekly payments there will be two months of the year that you will have three payments come out for your mortgage. These months will change each year depending on the payment dates you pick.

If bi-weekly options are not something that works for you, most mortgages will let you increase your monthly payments. All you would have to do to make your monthly payment equal to the rapid bi-weekly is add the difference to the monthly mortgage. Take your monthly payment and divide it by 12. That is the amount to add to your monthly payment. So in the example we were using simply by adding $124.82 to the monthly mortgage will work out the same way.

Make sure when you sign up for a mortgage, you are getting all the information that you need to make the right choice for you, not the bank.

Scott Bourke is an accredited mortgage professional with Dominion Lending Centres Regional Mortgage Group.

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