Do you have a monthly mortgage payment but get paid every 2 weeks? One of the simplest ways to reduce the total interest you pay is to split your mortgage payment in half and pay that amount every 2 weeks.
You’re not likely to notice the extra amount you are paying off but it can make a big difference over the entire mortgage.
Instead of making 12 payments, you would be making 26. The advantage is that it’s like paying an extra month directly to the principal every year.
As an example, if you have a $200,000 mortgage for 25 years @ 5%, you would pay $148,963 in interest over that time period. By switching to an accelerated bi-weekly mortgage payment you would pay $124,095 in interest and will have the mortgage paid off in 22 years. So in this example, that means by making this small change to your payments you would save almost $25,000 and be mortgage free 3 years sooner!
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Great article, brief, direct to the point, with an example.
Found your blog through another blogger’s site. Added you to my blog roll list.
Great to see a local Canadian financial/investment blogger!
Investment Blogger,
Thanks for the comment! And thanks for the link!
The mortgages I’m used to, in the US, do not allow partial payments.
A half-payment will be held until the rest arrives. The “envelope system” can implement your strategy, however. One should put aside the half payment with every paycheck. At month end when the mortgage is due, pay what you saved up. In 2 of the 12 months there will be an extra 1/2 mortgage payment. Note it on your check as extra principal. Any month you have a few extra bucks, just add it as well. If getting rid of the mortgage is your goal this is the fastest way to do it.
In canada most institutions have accelerated payment programs on top of lump sum payment option. For example TD has accelerated weekly and accelerated biweekly(annoyingly ambiguous). You can also increase your periodic mortgage payments by up to 100%. Aswell there is a lump sum payment option where you can pay up to 15% of your total mortgage amount down per year. This allows you to pay off your entire mortgage in a very small amount of time while, if necessary, having the security of small monthly payments should it be necessary.
An interesting analysis would be to see if paying a fee to a company to manage your biweekly payments would be worth it since some banks won’t allow an individual to do this, but they do allow a company to do it because they negotiate on behalf of hundreds of thousands of customers.
Jason @ Redeeming Riches´s last blog ..Confessions of a “Receiving” Addict