Is It A Better Idea To Make Your Mortgage Payments Weekly, Every Two Weeks, Or Monthly? - Prêt Hypo

By Author: Gregory van Duyse
Total Articles: 9
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You have probably heard that it is better to make your mortgage payments as frequently as we can. How can we best understand this strategy?

Let us look at the two alternate ways of making weekly or twice monthly payments (hypotheque).

-accelerated weekly payments
-minimum weekly payments

The method used most often is the accelerated weekly payment. This is the monthly payment, divided by 4, so what you are really doing is making more than 4 monthly payments, since there is a bit more than 4 weeks in a month. This is the accelerated payment method because there are an extra 4 payments in each year, so this increases the number of payments you are making against your loan (hypotheque) balance.

The next method is the minimum weekly payment in which you make the minimum payment that you can on the mortgage until it is paid off during its amortization period.

It is evident that the savings from these different two mortgage payment (hypothèque) methods is not the same. The minimum weekly payment only increases the frequency of the payments from 12 times a year to 52 times per ...
... 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 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 matter.

Why?

The explanation is not complicated, but nevertheless difficult to explain. Since there is less time between each payment, xome part of the capital of the loan (hypotheque) is being paid off a few days earlier each time. This therefore reduces 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 quite large.

What can we conclude from this? The more payments you make on your mortgage, the more you will save on your mortgage, without making any increase in payments. So, if it is at all possible, make your payments weekly, or at least every two weeks - prêt hypothécaire.

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 mortgage is paid off in 1,107 payments, or 21.3 years and the total savings will be $28,173.78i (see the calculations at the end of the article.)

An 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 payment for 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.