A borrower has a $300,000 mortgage at 4.5% with a 25-year amortization. They switch from monthly payments to accelerated bi-weekly payments, paying half the monthly payment every two weeks. What is the primary financial benefit?
Correct Answer
C) Faster principal repayment and interest savings
With interest compounded semi-annually, the monthly payment is about $1,660.42, so the accelerated bi-weekly payment is about $830.21. Twenty-six of those payments total about $21,585 a year, one extra monthly payment compared with $19,925 on the monthly schedule, and the extra goes to principal. The mortgage is paid off in about 21.7 years instead of 25, saving roughly $30,000 in interest; the rate itself does not change.
Why This Is the Correct Answer
Accelerated bi-weekly payments add roughly one extra monthly payment a year, and that extra money reduces principal. In this example the amortization falls from 25 years to about 21.7 years and interest drops by about $30,000, which is faster principal repayment and interest savings.
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