Does Paying Your Mortgage Weekly Or Every Two Weeks Really Have An Impact Over Paying It Once A Month? - Hypotheque
- Date: 2007-03-31 - Word Count: 578
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One often hears that it is better to make mortgage payment once a week, or once every two weeks - prêt hypothécaire.
What is the result of this strategy?
In order to answer this question, we have to define the two possible bi-weekly payment possibllities:
• accelerated weekly payment
• minimum weekly payment
The method that most people use is the accelerated weekly payment method. With this method, the standard monthly payment is divided by 4. When you understand this, you will realize that you are really remitting more payments than you would otherwise over the course of a year. There are more than 4 weeks in a month, so with this system, you end up paying an extra 4 payments per year on your home loan - prêt hypothécaire.
It is evident that the savings from each of these two mortgage payment (hypothèque) methods is not alike. The minimum weekly payment only 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 interest rate of 5.4%, in comparison with monthly payments - hypothèque.
2. The higher the interest rate, the better the weekly payment will fare. If the rate is doubled, the savings will be 7.08 times greater.
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 make a difference.
Why?
The explanation is simple, but nevertheless difficult to describe. Since there is less time between each payment, xome part of the capital of the loan (hypothèque) is being paid off a few days earlier each time. This will reduce the total interest on the loan, since there is a lower balance for the interest to be charged on. This savings may seem small on a week by week basis, but the overall savings is substantial.
What can we conclude from this? The more payments you make on your mortgage, the more you will save on your mortgage, without at all increasing payments. So, if it is at all possible, make your payments weekly, or at least every two weeks - hypothèque.
The accelerated weekly payment
If you decide to pay your payments with the accelerated weekly payment method, it will increase the payment by $23.25 per week on the $200,000 mortgage (at 5.4%, amortized over 25 years).
With this case, the home loan is paid off in 1,107 payments, or 21.3 years and the total savings will add up to $28,173.78i (see the calculations at the end of the article.)
The only exception to this rule would be if you have a fixed or guaranteed investment which is paying 7.52% interest annually, before taxes.
Choosing the best method of paying down your home loan 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.
What is the result of this strategy?
In order to answer this question, we have to define the two possible bi-weekly payment possibllities:
• accelerated weekly payment
• minimum weekly payment
The method that most people use is the accelerated weekly payment method. With this method, the standard monthly payment is divided by 4. When you understand this, you will realize that you are really remitting more payments than you would otherwise over the course of a year. There are more than 4 weeks in a month, so with this system, you end up paying an extra 4 payments per year on your home loan - prêt hypothécaire.
It is evident that the savings from each of these two mortgage payment (hypothèque) methods is not alike. The minimum weekly payment only 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 interest rate of 5.4%, in comparison with monthly payments - hypothèque.
2. The higher the interest rate, the better the weekly payment will fare. If the rate is doubled, the savings will be 7.08 times greater.
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 make a difference.
Why?
The explanation is simple, but nevertheless difficult to describe. Since there is less time between each payment, xome part of the capital of the loan (hypothèque) is being paid off a few days earlier each time. This will reduce the total interest on the loan, since there is a lower balance for the interest to be charged on. This savings may seem small on a week by week basis, but the overall savings is substantial.
What can we conclude from this? The more payments you make on your mortgage, the more you will save on your mortgage, without at all increasing payments. So, if it is at all possible, make your payments weekly, or at least every two weeks - hypothèque.
The accelerated weekly payment
If you decide to pay your payments with the accelerated weekly payment method, it will increase the payment by $23.25 per week on the $200,000 mortgage (at 5.4%, amortized over 25 years).
With this case, the home loan is paid off in 1,107 payments, or 21.3 years and the total savings will add up to $28,173.78i (see the calculations at the end of the article.)
The only exception to this rule would be if you have a fixed or guaranteed investment which is paying 7.52% interest annually, before taxes.
Choosing the best method of paying down your home loan 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.
Related Tags: mortgage, home loan, mortgage rates, hypotheque, taux hypothecaire, prêt hypothécaire
Gregory is an Accredited Mortgage Professional (AMP). To get more information on Home Loans - pret hypothecaire, please visit: Hypotheque | Mortgage Your Article Search Directory : Find in Articles
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