You have frequently heard it said that you are wiser to make mortgage payments once a week or every two weeks.
How does this strategy affect you? - prêt hypothecaire
To respond to this question, you have to examine the two alternate ways of making these payments:
1. accelerated weekly payment
2. minimum weekly payment
The usual method is the accelerated weekly payment. It is really the monthly payment divided by 4. But in reality, there is not 4 weeks in a month, but a bit 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 mortgage (prêt hypothécaire) 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 home loan is paid off.
You can see right away that the savings from these two methods will not be the same. The minimum weekly payment (hypothèque) will increase the frequency of payments from 12 times annually to 52 times annually, 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
Let us use a hypothetical loan of $200,000 at 5.4%, with a 25 year amortization period. This method of payment would save the borrower $1,294.12 over the life of the loan - hypotheque.
If the interest rate were higher, he would save a lot more. An interest rate of twice as much would yield a savings 7.08 greater.
The borrower will have a 43% savings with a once a week payment instead of a once every two weeks payment. The rate of interest will not affect this.
How can this be?
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 mortgage, even if you never 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.
Yes, it is important to choose the best payment method for your mortgage, but the most important thing is to choose the best mortgage strategy for your situation.
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.
Article Source: http://www.orbitaloc.com/
Gregory is an Accredited Mortgage Professional (AMP). To get more information on Home Loans - pret hypothecaire, please visit: Hypotheque | Mortgage
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