Definition of Semi Monthly Mortgage Payments
Semi monthly mortgage payments are structured for the borrower to make payments 2 times per month, for instance, on the 1st and 15th of each month. Sometimes, semi monthly payments are referred to as bi weekly payments, but the two methods are not necessarily the same.
If payments are structured to be paid on two dates per month, such as the first and 15th days of each month, the borrower will make 24 annual payments. If the payments are made bi-weekly, such as every other Friday, the borrower will make 26 payments annually. The two methods of payment can make a great deal of difference in the ultimate total of payments made, and the total interest paid. Bi-weekly payments (if accelerated) are the equivalent of making 13 monthly payments, whereas semi monthly payments are the equivalent of making 12 monthly payments. Non accelerated bi-weekly payments are a little less per payment period.
Example
Mr. McGillicuddy obtains a $200,000 mortgage with a 6% interest rate and a 25 year amortization period. Under these factors, the differences between a semi monthly payment and an accelerated bi-weekly payment are as follows:
Semi Monthly Payments
Monthly payment $639.02
Total of payments $383,410.30
Total Interest $183,410.30
Accelerated Bi-Weekly Payments
Bi-weekly accelerated payment $639.81
Total of payments $349,849.96
Total Interest $149,849.96
Non Accelerated Bi-Weekly Payments
Bi-weekly accelerated payment $589.81
Total of payments $383,372.62
Total Interest $183,372.62
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In the example above, the borrower utilizing will save $33, 560.34 over the life of the amortization period. This is because the extra payment will be used to reduce the principal amount of the loan, thereby incurring less interest on the remaining balance. Over a period of many years, the reduction of the remaining balance adds up to a great deal of interest savings.
Schedules of payments will normally be made when the mortgage is first executed. When setting up mortgage payments, the borrower should understand the differences in the payment schedules and know the effect each payment will have on their repayment of principal over the life of the amortization period. The method the borrower chooses should be made clear when the mortgage is executed.
At FirstFoundation.ca understanding your mortgage, including repayment terms is vital to our ability to service your needs. We will be able to go through each repayment scenario with you, allowing you to make an informed decision regarding your repayment options.
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