Does paying more frequently pay down your mortgage faster?

Does paying more frequently pay down your mortgage faster?

There is a long-standing belief that paying your mortgage more frequently automatically helps you pay it off faster. But is that actually true?

Let’s break it down with a simple story about four sisters – Joan, June, Jane and Jenna – who we will assume all bought identical homes with identical mortgages. We will use $250,000 mortgage with a 25 year amortization at a 5% interest rate. The only difference? How often each sister makes her payment!

Sister 1: Joan – monthly payment

• 12 payments per year

• Payment amount $1454

• Total interest over 25 years $186,204

Sister 2: June – semi monthly payment

June pays twice each month, i.e., on the 1st and 15th

• 24 payments per year

• Payment amount $727

• Total interest over 25 years $185,753

Even though June pays more often than Joan, the total interest cost is similar because she is still paying the same amount annually. It is a difference of $450.47.

Sister 3: Jane – biweekly payment

Jane pays every two weeks.

• 26 payments per year

• Payment amount $671

• Total interest over 25 years $185,719

Despite paying more frequently, her yearly total is the same as Joan’s and June’s. So, her mortgage still takes the full 25 years to pay off.

This is where most people get confused.

Regular biweekly is NOT the same as accelerated biweekly.

Sister 4: Jena – accelerated biweekly payment

Jenna uses accelerated biweekly, which does pay the mortgage faster.

How?

Her lender takes the monthly payment and simply divides it in half – creating 26 slightly larger payments per year. This results in one full extra monthly payment each year, without her noticing much difference.

• 26 accelerated payments

• Payment amount $727

• Mortgage paid off in 21.6 years

• Total interest cost $155,984

Jenna becomes mortgage free 3.4 years earlier and saves approx $30,00.00 in interest compared to her sisters.

THE BIG TAKEAWAY

Payment timing alone does not make a difference.

All three schedules – monthly, semi monthly, regular biweekly – pay the mortgage off at the same pace, with almost identical interest costs.

The only sister who gets ahead is Jenna because she is paying more every year, thanks to the extra payment created by the accelerated schedule.

BOTTOM LINE FOR HOMEOWNERS

If your goal is to pay off your mortgage faster:

• switch to accelerated biweekly or

• increase your payment amount or

• make extra payments or lump sum payments