Payment frequencies – What choices do you have?
August 30, 2009 Employed Persons, First Time Home Buyer, List, Pre Approval No CommentsA key question for most first time home buyers is how often do I have to pay my mortgage?
In previous generations they only had one choice – monthly. This was largely due to the fact that each of these transactions were done manually at the bank level and to have more choices would make the task of processing these transactions very complex.
Today all of these transactions are done with computers. The computer uses its considerable ability to make payments as often as necessary for the exact right amounts. So today we have choices!
Most lenders give their customers four choices: Monthly, Semi Monthly, Bi Weekly and Weekly.
We still have the Monthly Payment option. Payments are made on a specific day every month. People typically choose the first of each month to make their payments. So for example if you have a mortgage payment that is $1000 you will then pay $1000 each month on the first of the month. Totaling 12 payments a year and $12,000 in payments every year.
The next option is Semi Monthly Payments. Semi Monthly means that you make two payments every month. This is a great option for people who get paid from their jobs twice a month. Payments are typically made on the 1st and 15th of every month. So to compare against the example shown above the semi monthly payments would each be for $500 and you would make two each month. So you would make 24 payments through the course of the year for a total of $12,000 in payments every year. This option is all about ease of budgeting and convenience.
Next on our list of payment options is Bi Weekly Payments. Bi Weekly Payments mean that you will make a payment every second week through out the year – typically every second Friday. This means that there will be two months where you will make one extra payment – these months are July and December. So the advantages are two fold. Firstly if you get paid every two weeks at your job then it makes budgeting easier. Secondly those extra two payments get applied directly to your principal thusly doing two things, shortening your amortization and reducing the total interest you will pay on your mortgage. So using the example above you would make payments of $500 every two weeks. Throughout the course of the year you would make 26 payment for a total of $13,000 a year with $1,000 applied directly to your principal.
The last option on our list is Weekly Payments. In this case you make your payments on a weekly basis. It maybe useful for people who get paid weekly. So with the example noted above you would have payments of $250 every week. 52 payments made every year for a total of $13,000 a year with $1,000 applied directly to your principle.
So when my customers ask which is right for them what I typically ask them is how often do they get paid then suggest that they choose a payment plan that mimics this.
One last key thing to note about payment frequencies is that with most lenders you can change your payment frequency at any time.
