Buying a home is a large responsibility, and the monthly payment will likely be your single largest expense every month. However, just as there are a variety of terms to choose when deciding on your mortgage (such as 15 year or 30 year or fixed rate or adjustable rate), there are also a variety of ways you can make your payment.
Some people prefer to make semi-monthly mortgage payments rather than one monthly mortgage payment.
What Are Semi-Monthly Mortgage Payments?
If you choose to repay your mortgage on a semi-monthly basis, you will likely be required to make half of your monthly payment on the 1st of the month and the other half on the 15th.
What Are the Advantages of Semi-Monthly Mortgage Payments?
Semi-monthly mortgage payments offer several advantages:
- May be easier to make payments. If you are paid on the 1st and the 15th, making semi-monthly mortgage payments may be easier than a monthly payment because you are making smaller payments, and you are making those payments when you are paid, so the money is easily available.
- Can lessen how much you pay over time. Because you are paying twice a month, you reduce the amount of interest that you pay over the life of the loan. When you only make one payment a month, the interest balance can continue to accrue over 30 or 31 days. With semi-monthly payments, the interest never accrues more than 15 days. For instance, if you have a mortgage for $200,000 at 5% interest for 30 years, you would pay $186,513.10 on a traditional mortgage that is paid once a month. However, if you pay on a semi-monthly basis, your overall interest paid over the life of the loan is $186,339.34, or $173.76 less over 30 years. While this isn’t a huge sum, you reap this savings simply by changing when you make payments.
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What Is the Difference Between Semi-Monthly and Bi-Weekly Mortgage Payments
Many people think semi-monthly and bi-weekly payments are the same, but they are not. With a semi-monthly payment, you are paying on the 1st and 15th of every month. With a bi-weekly mortgage payment, you are paying every two weeks, so in the course of a year, you actually make the equivalent of 13 monthly payments (52 weeks divided by 2 = 26 payments = 13 monthly payments). Over the years, the extra payment can be a powerful tool to decrease your mortgage balance.
Bi-Weekly Mortgage Payments Are More Effective
While the above example showed that you could save $173.76 over the course of the mortgage simply by making semi-monthly payments, the results are much more dramatic with a bi-weekly mortgage because you are making an extra payment every year. By making bi-weekly payments, you would pay off your 30 year mortgage in a little more than 25 years and save $34,356.98 in interest!
While a semi-monthly repayment plan does reduce the amount of interest you pay slightly and can make your monthly mortgage payments seem more manageable, if you are looking to slash a number of years off your mortgage and save thousands of dollars on interest, a bi-weekly mortgage may just be the way to go.