Mortgage vs. HELOC
When you purchase a mortgage you'll be glad to know that you have flexibility to choose the frequency of your mortgage payments. Just because the default and most common payment type is a monthly payment does not mean that you can't choose a different payment type. The available payment types are: monthly, semi-monthly, bi-weekly, accelerated bi-weekly, weekly and accelerated weekly. The more frequently you make payments the more you end up saving on interest over the life of the mortgage. For maximum savings try an accelerated bi-weekly or accelerated weekly payment frequency.
Let's use the following example:
The payment will be withdrawn from your account once per month, on a specified day chosen by you. Therefore you end up making 12 payments per-year. Based on the mortgage rate details of the example above the monthly payment would be $1,248. You can use a mortgage payment calculator to double check this.
The payment will be withdrawn from your account twice per month, on days specified by you (i.e. the 1st and 15th of the month). This should not be mistaken with bi-weekly payments examined below. With a semi-monthly payment frequency you end up making 24 payments per year. Therefore using the same mortgage details above, the payment would be $624 (monthly payment/2).
The payment will be withdrawn from your account every two weeks. It is a very popular payment type since many people get paid bi-weekly and thus it is easy to align your mortgage payment with when you get paid. With a bi-weekly payment structure you end up making 26 payments per year. The payment is calculated as monthly payment/12 x 26 or $576 for the example.
Choosing the accelerated bi-weekly payment frequency will result in you making an extra monthly payment per year. You make payments every two weeks however the payment is higher than the regular bi-weekly payment. An accelerated bi-weekly payment is calculated as monthly payment/2. Unlike the $576 bi-weekly payment, the accelerated bi-weekly payment ends up being $624. Because of the increased payment with the example above you can expect to pay off your mortgage 3 years sooner and save approximately $16,422 in interest over the life of the mortgage.
A weekly payment, calculated as the monthly payment/12 x 52 or $288 for the example, will be withdrawn from your account every week. This payment structure results in 52 payments made per year.
Just like an accelerated bi-weekly payment, an accelerated payment results in one extra monthly payment per year. It is calculated as the monthly payment/4 or $312 using the same example. This increased payment results in you paying your mortgage 3 years sooner and saving $16,600 over the life of the mortgage (notice that the savings are slightly higher with a accelerated weekly payment compared to an accelerated bi-weekly payment due to the higher payment frequency).