Did you know that you can save thousands of dollars on your mortgage with one simple step? By changing your payments from monthly to bi-weekly, you can save money and take several years off your mortgage amortization schedule.
Read on to learn how the bi-weekly payment method can work for you.
How are bi-weekly payments calculated?
When you switch to bi-weekly payments, you reduce your mortgage principal each year by exactly the same amount as your monthly payment. That’s because you end up paying for one extra month worth of payments. Put simply, in one year you pay 12 times, but with bi-weekly payments it works out to 26 times, which is the equivalent of paying for 13 months. That is one extra payment per year compared to a monthly plan.
How do bi-weekly payments save money?
When you get a mortgage, it is split into two parts – the principal and the interest. The principal is the amount you actually owe the lender and the interest is the cost that you pay the lender for borrowing the money. Part of the mortgage involves a repayment schedule, called the amortization schedule. In the early years of your loan, most of the payment goes toward paying down the interest. As you continue to pay back the loan, the balance between the two begins to shift and you then start to pay back the principal portion later in the cycle.
When you pay down the mortgage, you are required to pay a specific set amount of interest each year. The amortization schedule doesn’t consider more payments, so when you pay bi-weekly that 13th payment gets applied to your principal balance. In short, your loan balance is reduced by an entire payment.
How many years can it save you?
How much you can save will depend entirely on your amortization length and type of mortgage you hold. For example, if you hold a 25-year amortization it could save you approximately four years worth of payments. If you have the capacity to make two payments a month, it is worth the savings.
What should you look out for?
Before switching to bi-weekly payments, you should check into whether there are any potential fees associated with this option. If there are fees, you should weigh them against the total cost savings of the bi-weekly payments – it could still be a better option for you as opposed to monthly payments.
If you are looking for a smart way to save money on your loan, bi-weekly payments might be the right option for you. Talk to your Toronto mortgage advisor from VERICO The Financial Forum on whether you qualify and to discuss other mortgage refinancing strategies that put money back in your pocket.
