Please explain the merits/demerits of Bi-weekly Mortage Payment

[borisdavenport]

I am a little bit confused about the term "Bi-weekly Mortage Payment". One colleague referred me a calculator named Biweekly payment calculator and advised that a bi-weekly mortgage payment is better than my current plan. I am not an expert on this matter. Is there any financial wizards here, please help me. Do these bi-weekly payments really save our money, I need to know more about it?

 

[borisdavenport]

Is it really useful to people like us or yet another plan to loot our money?

 

[adriano]

Bi weekly payments cut down on the time for you to pay off the mortgage. It saves a lot over the life of the mortgage. It is a good thing in my opinion, but others may not agree. I think paying down your mortgage quicker gives you more equity for other purchases that may come along.

 

[Thomas Beyer]

52 weeks a year implies 26 biweekly payments i.e. one more monthly payment vs 12 monthly payments as 26/2 = 13

It is the same as a shorter amortization period.

Depends on your world view of " paying off a 2.5% mortgage fast is a good thing"

 

[Matt Crowley]

^ Yes.

Also, from a cash flow point of view, you are usually good to have similar timing for your cash inflows and cash outflows as it will ease the pain of suite turnovers. If you have a vacant suite for a month but you are paying bi-weekly payments you will need a higher cash reserve than if you have monthly mortgage payments because tenants prepay the first month's rent and DD. Can be a cash flow management issue when it comes to speeding up those payments.

 

[kfort]

On a 30yr amm at 3% WEEKLY knocks your payoff period down about 5 years. It's a little more if I recall correctly.

I'd pay daily if they'd let me. I always max the amm, and make the most frequent payments allowed by the lender. Extra special Friday's are when the bi-weekly and weekly payments all line up and I calculate principle repaid ..

 

[Thomas Beyer]

On a 30yr amm at 3% WEEKLY knocks your payoff period down about 5 years. It's a little more if I recall correctly.

I'd pay daily if they'd let me. I always max the amm, and make the most frequent payments allowed by the lender. Extra special Friday's are when the bi-weekly and weekly payments all line up and I calculate principle repaid ..

Why not get 25 year am and pay monthly ? It is the same thing.

 

[kfort]

Why not get 25 year am and pay monthly ? It is the same thing.

Not really, the payment is smaller. Roughly $50/month/ $100k if I remember correctly.

 

[Matt Crowley]

^ No... that math does not make sense.

The way to think about it is that any additional principal payment you make is going to earn the mortgage rate as a rate of return. So if you make an additional $50 payment per month then you earn for example, 2.94% per year on that money, compounded semi-annually.

Here, you are not making any additional payments, you are speeding up the payment frequency. So the bank gets the principal payment a maximum of 3 weeks earlier than they were initially expecting it... difference is going to be extremely minimal.

I ran a loan of $275,200 to demonstrate at 2.94%, 25 yr amortization:

Monthly payments = total mortgage payment $388,173
Bi-weekly payments = total mortgage payment $387,920
Weekly payments = total mortgage payment $387,816

So, from going from monthly to weekly mortgage payments you saved $357 over the entire term of the mortgage.

 

[Thomas Beyer]

^ No... that math does not make sense.

The way to think about it is that any additional principal payment you make is going to earn the mortgage rate as a rate of return. So if you make an additional $50 payment per month then you earn for example, 2.94% per year on that money, compounded semi-annually.

Here, you are not making any additional payments, you are speeding up the payment frequency. So the bank gets the principal payment a maximum of 3 weeks earlier than they were initially expecting it... difference is going to be extremely minimal.

I ran a loan of $275,200 to demonstrate at 2.94%, 25 yr amortization:

Monthly payments = total mortgage payment $388,173
Bi-weekly payments = total mortgage payment $387,920
Weekly payments = total mortgage payment $387,816

So, from going from monthly to weekly mortgage payments you saved $357 over the entire term of the mortgage.

Indeed the savings are tiny tiny.

You're saving 2.94% per year on the extra roughly one month payment of ca. $1150 extra per year or roughly $30/year. Times maybe 21 years. Weekly payments are basically the same as shorter amortized mortgage with monthly payments.

A philosophical debate as to " is it desirable to pay a cheap mortgage off quickly or is it better to live a bit better and/or buy more real estate assets?"

 

[kfort]

Where am I going wrong, I popped in 80k loan @3% for 30yr and weekly = $78. Monthly @3% for 25yr = $380.

78 x52 = $4,050 for the year.
380x 12 = 4,560 for the year.

One seems to be paying less while still paying it off in ~25yrs due to interest savings.

What did I do wrong?

 

[Matt Crowley]

Where am I going wrong, I popped in 80k loan @3% for 30yr and weekly = $78. Monthly @3% for 25yr = $380.

78 x52 = $4,050 for the year.
380x 12 = 4,560 for the year.

One seems to be paying less while still paying it off in ~25yrs due to interest savings.

What did I do wrong?

You are making extra payments per year in gross terms with weekly vs. monthly. Also I don't think your calculator is working properly.

SCENARIO 1: Canadian mortgages compound semi-annually. $80,000 loan at 3% for 30 year amortization for both scenarios.

Weekly payment = $77.58
Monthly payment = $336.48

52 weeks per year = 52 weekly payments * $78 = 4,056
12 months per year = 12 monthly payments * $336.48 = 4,038

Difference = $18

SCENARIO 2: Your calculator did the calculations monthly calculation wrong. Here weekly amortization is 25 years and monthly amortization is 30 years

Weekly payment = $87.29
Monthly payment = $336.48

52 weeks per year = 52 weekly payments * $87 = 4,539
12 months per year = 12 monthly payments * $336.48 = 4,038

Difference = $501. So you are paying an additional $501 per year with the weekly payment

Total mortgage payments, weekly option 25 year amortization = 113,477
Total mortgage payments, monthly option 30 year amortization = 121,133

Difference = $7,658 for an additional 5 years to repay loan

It doesn't matter what you play with for amortization or payment frequency, the interest payment frequency of the principal loan is always the exact same at 3%, compounded semi-annually. If you pay more principal earlier, you pay less interest overall.

 

[kfort]

Okay so looks like we got same # for the weekly 30yr amm payment total (~$4050).

I still get a monthly payment of $379.xx on a 25yr amm.

I understand compounding periods and that the savings come from a small (but compounding!) increase in principle pay down prior to the 6 month compounding calc.

After that I'm clearly not understanding something but I do appreciate your patience trying to help.

 

[kfort]

I like the philosophy of paying down vs keeping the cash and living life idea. Sometimes tough to balance that as my calculator won't tell me how many earth days I've got left!

 

[Thomas Beyer]

Th difference is: are you paying 1/4 the monthly payment weekly i.e. an extra full monthly payment a year, or are you merely keeping the amortization the same and pay slightly less than 1/4 of the monthly payment per week ?

 

[kfort]

I was talking a weekly accell 30yr amm vs, 25yr monthly. Both pay down in ~25yr but unless I'm wrong on the math (?) Weekly/30 ends up cheaper.

 

[Matt Crowley]

Okay so looks like we got same # for the weekly 30yr amm payment total (~$4050).

^ No. You are mixing up amortizations in your example.

Comparing weekly 30 year amortization to annual 25 year amortization: weekly is less expensive on an annual basis simply because you are extending the amortization by 5 years. It has practically nothing to do with benefits of payment frequency.

A) Weekly 30 year amortization is $4,034 per annum, total repayment $121,025
B) Monthly 30 year amortization is $4,038 per annum, total repayment $121,132
C) Monthly 25 year amortization is $4,543 per annum, total repayment $113,580
D) Weekly 25 year amortization is $4,539 per annum, total repayment $113,477

You are comparing A) to C). You said "One seems to be paying less while still paying it off in ~25yrs due to interest savings."

This is wrong. You are paying it off slower ie. repaying the loan in 30 years instead of 25 years. The interest savings by having more frequent payments is pretty much zilch.

If you want a reliable comparison, look at C) vs. D). By increasing payment frequency from monthly to weekly you save $103 over the total 25 years of the loan. On an annual basis, you save $4. The big factor is the overall amortization period, not payment frequency.

(slightly different than my answers above due to rounding)

 

[kfort]

Gotcha, cooking with fire now.

Our monthly/ weekly numbers jive just not the timeline of payoff.
(& thank you again for your patience)

 

[Brent Shepheard]

Hi guys,

I’m new to the forum but I’m excited to be active. I’m a licensed mortgage broker in BC. If you want a detailed explanation message me. I can’t post the link to my blog post since I’m a new member.