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Posted on April 1, 2006 by Gregory van Duyse | Posted under Finance
Is it preferable to pay your home loan weekly, every two weeks, or monthly?
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What is the impact of this strategy? In order to be able to analyse this question, we have to understand the two possible bi-weekly payment scenarios: - accelerated weekly payment - minimum weekly payment The most common method is the accelerated weekly payment. It is actually the monthly payment divided by 4. But in reality, there is not 4 weeks in a month, but a little more. This method is called the accelerated payment method because is has 4 extra weekly payments over the course of the year and this fact by itself increases the payment made against the capital of the home (hypothèque) loan during the year. The other method is the minimum weekly payment. It is the minimum payment that you can make on your mortgage until the end of the amortization period, and the mortgage is fully paid. It is clear that the savings from these different two mortgage payment (prêt hypothecaire) methods is not the same. The minimum weekly payment just increases the frequency of the payments from 12 times a year to 52 times a year, while the accelerated weekly payment increases not only the frequency of payments, but also adds 4 extra payments. Let's look at the conclusion of my studies on mortgage payments for these two cases. The minimum weekly payment Summary: 1. The minimum weekly payment method saves $1,294.12 on a $200,000 loan amortized over 25 years with an annual rate of 5.4%, in comparison with monthly payments - prêt hypothecaire. 2. The higher the interest rate, the better the weekly payment works. If the rate is doubled, the savings will be 7.08 times more. 3. One receives 43% more savings with a weekly payment than with a payment every two weeks (14 days) and the rate of interest does not matter. Why? There is a simple explanation, but explaining it is not easy. There is less time between each payment, therefore a capital portion of the loan is consistently being repaid a few days earlier. This reduces the interest paid on the outstanding portion. Even though this savings is not very great for each payment, the overall cumulative total is substantial. Findings: The more payments that are made, the more you will save on your home loan, even if you do not increase the amount being paid. So, make your payment each week to get the most savings. If you can't do this, at least do it every two weeks. The accelerated weekly payment - Summary: 1. The accelerated weekly payment increases payments by $23.25 a week on a mortgage of $200,000 amortized over 25 years with an interest rate of 5.4%. 2. The home ($200,000) will be paid off in 1,107 payments, or 21.3 years. 3. The savings will be $28,173.78 (you can see the calculatons at the end of the article) 4. It will be wiser not to make accelerated payments if you have a fixed or guaranteed investment which earns 7.52% per year before taxes. Choosing the best method of paying down your mortgage is important, but not as important than choosing the best mortgage strategy. Notes : If someone buys a home for $200,000 (with a rate of 5.4%) and pays it once a month ($1,209.16 a month), he will have paid $362,749.83 after 25 years ($200,000 plus $162,749.83 in interest); on the other hand, with accelerated weekly payments ($302.29 per week), he will have paid $334,576.05 ($200,000 plus $134,576.05 interest) in 1,107 weeks our 21.3 years. This is a savings of $28,173.78 ($362,749.83-$334,576.05) to pay the same mortgage. About The Author: Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgages - prêt hypothecaire, please visit: Pret hypothecaire |
Tags: PRET HYPOTHECAIRE, PRêT HYPOTHéCAIRE, MORGAGE LOAN, HYPOTHEQUE, TAUX HYPOTHECAIRE
