You have probably heard that it is preferable to make your mortgage payments as frequently as we can. How can we best understand this concept?
Let us look at the two different ways of making weekly or twice monthly payments (prêt hypothécaire).
-accelerated weekly payments
-minimum weekly payments
The method that most of us use is the accelerated weekly payment method. With this way, the standard monthly payment is divided by 4. When you understand this, you will realize that you are really making more payments than you would otherwise over the course of a year. There are more than 4 weeks in a month, so with this method, you end up paying an extra 4 payments per year on your mortgage - hypotheque.
You can see right away that the savings from these two methods will be different. The minimum weekly payment (hypothèque) will increase the frequency of payments from 12 times annually to 52 times a year, while the accelerated weekly payment method actually ADDS 4 extra payments to the number of payments, in addition to increasing the frequency of payments.
We can look at my studies of these two methods of mortgage payments.
The minimum weekly payment
On a $200,000 mortgage, with 5.4% interest and an amortization period of 25 years, the savings is $1,294.12 compared to a monthly payment. The higher the interest rate, the higher the savings, by a large margin - prêt hypothécaire. An interest rate of double that rate would give a savings that is 7.08 times greater.
The borrower will have a 43% savings if he pays his loan once a week instead of once every two weeks. The rate of interest is not affected by this.
How is this possible?
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 constantly 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 never increase the amount being paid. So, make your payment each week to get the most savings. If not, at least do it every two weeks.
The accelerated weekly payment
An accelerated weekly payment will increase the payments on a mortgage by $23.25 per week on the $200,000 mortgage, amortized over 25 years at 5.4%.
In this case, the home will be paid for in 1,107 payments, or 21.3 years.
The total savings will total $28,173.78i (please refer to the calculations at the end of the article.)
However, you are better off not to make accelerated payments if you have a fixed or guaranteed investment that pays 7.52% annually before taxes.
It is important to choose the best payment method for your mortgage, but the most important thing of all is to choose 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.
