Tracey is buying a condo and will have a mortgage of $180 000 which she plans to pay off in 25 years.The interest rate is 5% compounded semi-annually.Her payments would be $1046 at the end of every month.She has heard she can reduce the time it would take to pay off her mortgage if she pays $523 every two weeks instead.How many years it would take her to pay off her mortgage if she chooses the second option.

Question

Quizplus · Accepted Answer

Paying bi-weekly instead of monthly can result in significant savings on mortgage interest and can reduce the amortization period. To calculate the new amortization period, we first need to figure out how much Tracey would pay if she made bi-weekly payments of $523.

$523 paid bi-weekly is equivalent to $1,046 paid monthly (since there are 52 weeks in a year, and 52/2 = 26 bi-weekly periods, which is the same as 12 monthly periods). Therefore, Tracey would be paying the same amount per year ($12,552) whether she paid monthly or bi-weekly.

If we assume an interest rate of 2.5% (5% divided by 2 since interest is compounded semi-annually), the bi-weekly payments of $523 would result in a new amortization period of approximately 21.5 years. Therefore, it would take Tracey 21.5 years to pay off her mortgage if she chooses to pay bi-weekly instead of monthly. This is a considerable reduction in time and could save her thousands of dollars in interest over the life of her mortgage.

Tracey Is Buying a Condo and Will Have a Mortgage