Payment Frequency And Interest Costs - What You Can Save
There is a commonly held belief that that increasing the frequency of your mortgage payments pays your mortgage off significantly faster. For example, paying bi-weekly versus monthly will allow for much faster mortgage paydown. This all stems from confusion around the fact that there are two types of payments - regular and accelerated. Here are the definitions of the various payment frequencies and an example of the impact of payment frequency on interest costs.
Payment Frequency Options
Monthly - one payment per month; 12 payments per year
Semi-Monthly - Monthly payment x 12 / 24 (or half the monthly payment); two payments per month; 24 payments per year
Bi-Weekly - Monthly Payment x 12 / 26; payments every two weeks; 26 payments per year
Accelerated Bi-Weekly - Monthly Payment x 13 / 26; payments every two weeks; 26 payments per year
Weekly - Monthly Payment x 12 / 52; payments every week; 52 payments per year
Accelerated Weekly - Monthly Payment x 13 / 52 payments every week; 52 payments per year
Interest Savings By Payment Frequency
Let's break out the total interest savings over 25 years for each payment frequency versus the base required monthly payment. This is for a mortgage of $300,000 amortized over 25 years at 4%. This is a bit simplistic because it does not take into account the varying terms and rates within the life of a mortgage, but it will still illustrate how much payment frequency drives interest savings.
Monthly payment = $1578 ($173,420 interest paid over the life of the mortgage...GULP)
Semi-Monthly payment = $789; interest savings $390
Bi-Weekly payment = $728; interest savings $420
Accelerated Bi-Weekly payment = $789; interest savings $24,550 and mortgage paid off 3 years 1 month early
Weekly payment = $364; interest savings $605
Accelerated Weekly payment = $395; interest savings $24,820 and mortgage paid off 3 years 1 month early
While there is a slight benefit to paying more frequently this is a very minor amount. The amount you pay extra, above your base mortgage amount, is what has the big impact. This can be done by setting your mortgage payments to be "accelerated", or by using other pre-payment options such as lump sum payments or by calling to increase your payment.
You shorten your mortgage and save significant interest costs by increasing your mortgage payments, not by paying more frequently.
If you have goals for paying off your mortgage faster, let's come up with a plan! Small amounts over time add up to a big impact later.