Bi-weekly payments won’t pay your mortgage off faster. Yup, it’s true. Around 4 yrs ago, I wrote an article showing some simple but effective math to explain this. Recently, I’ve had several readers and clients ask me about bi-weekly payments.
I thought I’d repost that article as it seemed to get a lot of attention and answered a great many questions on what it really takes to pay your mortgage off faster.
Repost from July 2010….
Back in the mid 90’s, there was a huge marketing blitz by the Big Banks that promoted making bi-weekly payments instead of the traditional monthly payments. The sales pitch was that you could save huge amounts of money and pay your mortgage off much faster….save 4 or 5 years off your amortization…. Sound familiar? Well, BI-WEEKLY PAYMENTS DON’T REALLY SAVE AS MUCH AS YOU THINK!
And I’ll prove it…. here’s the straight facts!
Let’s use a $200,000 mortgage with a 25 year amortization, a 4.00% interest rate and a 5 year term.
MONTHLY PAYMENTS $1,052.04. MORTGAGE BALANCE AT END OF 5 YEARS $174,107.86.
Now let’s calculate bi-weekly payments and the balance remaining at the end of the 5 year term.
BI-WEEKLY PAYMENTS $485.55. MORTGAGE BALANCE AT END OF 5 YEARS $173,885.20
So you end up reducing your balance by only $222.66 over a 5 year period... Not much of a benefit…you really aren’t paying your mortgage off sooner.
You may have seen options by your Lender or Bank to pay an ACCELERATED PAYMENT. This simply means you increase the amount you pay every month… The normal acceleration formula is to make one more month’s worth of payments every year but spread it out over the 12 months… I’ll show you.
LET’S USE THE SAME MORTGAGE OF $200,000, 25 year amortization, 4.00% interest rate and a 5 year term.
ACCELERATED MONTHLY PAYMENT $1,139.71. MORTGAGE BALANCE AT END OF 5 YEARS $168,300.27.
You end up with a balance that is $5,807.59 lower at the end of 5 years…but don’t forget, you paid and extra month’s worth of payments every year during those 5 years, totaling $5,260.20. So the net benefit is really $547.39….
Now let’s look at ACCELERATED BI-WEEKLY PAYMENTS of $526.02….the MORTGAGE BALANCE AT END OF 5 YEARS IS $168,121.95.
The net benefit is a little better… $725.71…
BOTTOM LINE…. increase your payments and you’ll pay your mortgage off sooner…go with a bi-weekly ACCELERATED payment… it is a better choice.. bi-weekly or weekly payments are not a mysterious formula for paying your mortgage off sooner… It’s the INCREASED PAYMENT that helps you pay it off sooner…… After all, the best mortgage is no mortgage.
Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.
Steve Garganis 416 224 0114 firstname.lastname@example.org