How to Pay Your Mortgage Off Faster – Bi-weekly, Weekly, or Monthly?

I get a lot of questions from clients that run along a similar vein:

“How do I pay my mortgage off faster? Should I do bi-weekly? Weekly? Semi-monthly? or Monthly payments?”

First, let me define what these terms mean:

Weekly is one payment every 7 days
Bi-weekly is every 14 days such that you pay the same amount as the monthly amount over the year
Bi-weekly accelerated is the monthly payment, divided by two, every 14 days
Semi-Monthly is either 1st and 15th or 15th and 30th (depending on the bank)
Monthly is one payment every month on the same date

Let’s provide a numerical example to what these mean. Suppose that your mortgage has minimum payments of $1,000 per month and is amortized over 35 years. How long does it take to pay it off using the following structures.

MONTHLY
This one is fairly obvious: $1,000 per month.

Time to payoff: 35 years.

WEEKLY
Calculated and paid as follows:

$1,000 x 12 = $12,000 per year in payments
$12,000 / 52 = $230.77 per week

Time to payoff: 35 years.

BI-WEEKLY (Normal)
$1,000 x 12 = $12,000 per year in payments
$12,000 / 26 = $461.54 every 14 days

There are 26 bi-weekly periods in a year (52 weeks divided by 2). This payment scheme results in EXACTLY the same payoff period as a monthly payment. In other words, just doing bi-weekly doesn’t pay it off any faster. You have to use bi-weekly accelerated (described next).

Time to paoff: 35 years.

BI-WEEKLY (Accelerated)
$1,000 / 2 = $500 every 14 days

Notice that this payment scheme results in:
26 x $500 = $13,000 in payments per year

This means that $1,000 extra is paid throughout the year (1 full extra monthly payment) compared to weekly, bi-weekly normal, or monthly payments, and THIS is the reason that bi-weekly payments result in a faster mortgage payoff period. It isn’t some special scheme of paying interest off faster, or anything like that. It is simply paying more.

Time to payoff: 29.45 years.

SEMI-MONTHLY
$1,000 / 2 = $500 on the 1st and 15th or 15th and 30th.

Note that this is still only $12,000 a year paid towards the mortgage, and therefore still is only paying it off as fast as monthly.

Time to payoff: 35 years.

THE MORAL OF THE STORY

There is no panacea or “magic pill” or technique to out-smart the banks. The only way to pay your mortgage off faster is to do just that: pay it off faster (i.e. put more money against it sooner than required).

Many people get confused and say, “but I heard that bi-weekly pays it off faster.” Dead nuts wrong. “Bi-weekly accelerated” pays it off faster.

Look at this this way: if you are only paying $12,000 per year ($1,000 per month is the minimum) then you will only pay it off in 35 years no matter how you slice it. That makes sense, doesn’t it? If you want to pay it off sooner, you have to put extra cash out of pocket. It’s the only way.

Before anyone jumps on me about the “truth in equity” style of pre-payment (a line of credit used as your operating account), let me point out that this system only works by paying extra against the principle. If you want the details, go to www.truthinequity.com and if you pay attention you will notice that it is only by making extra payments that the system works. It DOES work, but it DOES require extra cashflow or extra money to be put towards the mortgage (or line of credit).

Bottom line: if you want it paid off soon then PAY IT OFF SOONER!

~ by merc359 on June 21, 2009.