One of the most commonly misunderstood terms used in the mortgage industry is biweekly payments. The confusion comes from there being two options. Biweekly and accelerated biweekly. When most people use the term biweekly, they are referring to accelerated biweekly. However, many may not even realize that there is also a non-accelerated version. Which leads us to answer the title of this blog. What’s the difference between a biweekly and an accelerated biweekly payment? Let’s look at the descriptions for both, so you can then decide which one you think is right for you:
Accelerated Biweekly
An accelerated biweekly payment is calculated by taking your monthly payment and dividing it by two. The payment is then made every two weeks, hence the term ‘biweekly’. By accelerating the payment, you’re making the equivalent of one additional monthly payment per year, which is applied directly toward your principal. Accelerated biweekly payments will automatically drop your effective amortization from 25 years down to roughly 22 years, 6 months, or a 30-year amortization down to roughly 27 years. The exact amount will vary slightly depending on your mortgage rate.
Biweekly
A regular biweekly payment is calculated by multiplying your monthly payment by 12 and then dividing by 26 (as there are 26 payments per year). As your total payments for the year are identical to making monthly payments, regular biweekly payments to not provide any additional benefit. If you start with a 25 year amortization, your effective amortization will also be 25 years unless you utilize your prepayment privileges.
Payment Differences
The payment will always be lower with regular vs accelerated biweekly. For example, let’s say you have a $500,000 mortgage amortized over 25 years at a rate of 1.79%. Your accelerated biweekly payment would be $1,033.47, however your regular biweekly payment would only be $953.96. Not that big of a difference considering you’ll be knocking close to three years off your mortgage. However, non-accelerated options are great for those looking to maximize your cash flow.
If you are looking to purchase or refinance a home over the next few months, contact us today at 877-296-2696 or email us at info@homemortgageadvice.ca.