You have probably heard that it is preferable to make your home loan payments as frequently as possible. 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 usual method is the accelerated weekly payment. It is actually the monthly payment divided by 4. But in actuality, there is not 4 weeks in a month, but a little more. This method is called the accelerated payment method because is has 4 additional weekly payments over a whole year and this fact alone increases the payment made against the capital of the home (prêt hypothecaire) loan during the year.
The other method is the minimum weekly payment. It is the minimum payment that you can make on your home loan until the end of the amortization period, and the home loan is fully paid.
It is clear that the savings from these different two mortgage payment (hypotheque) methods is not the same. The minimum weekly payment just increases the frequency of the payments from 12 times a year to 52 times per year, and the accelerated weekly payment increases not just 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%, compared to monthly payments - hypotheque.
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 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 make a difference.
Why?
The explanation is simple, but difficult to describe. Since there is less time between the payments, one part of the capital is repaid a few days earlier, which more rapidly reduces the interest paid on the amount that is paid down. The savings is small for each payment but increases drastically over time.
Conclusion: The more often you make the payments, the greater the savings, even if you do not increase the amount paid. If it is possible, make your payments each week, if not, pay your mortgage every two weeks - prêt hypothecaire.
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 (the calculations are at the end of the article)
4. It will be better not to make accelerated payments if you have a fixed or guaranteed investment which earns 7.52% per year before taxes.
It is important to pick the best payment method for your mortgage, but the most critical 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.
Gregory is an Accredited Mortgage Professional (AMP). To get more information on
mortgages - prêt hypothecaire, please visit:
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