Is it better to pay your home loan weekly, every two weeks, or monthly?

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Is it better to pay your home loan weekly, every two weeks, or monthly? - prêt hypothecaire - By: Gregory van Duyse, Posted on: 2007-09-13

You have often heard it said that you are better off making mortgage payments once a week or every two weeks.
How does this strategy ? - prêt hypothecaire

To respond to this question, you have to look at the two alternate ways of making these payments:

1. accelerated weekly payment
2. minimum weekly payment

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

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

Obviously, the savings from the two different methods will not be the same. The minimum weekly payment method only increases the number of payments from 12 to 52. The same amount of money is paid. The accelerated weekly payment method (hypotheque) allows you to pay four more payments in a year, in addition to increasing the number of payments.

I have done studies of these two paydown methods, so let us examine them.

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 - prêt hypothecaire.

If the interest rate were higher, his savings would be substantially higher. An interest rate of twice as much would mean 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?

The explanation is not complicated, but nevertheless difficult to explain. Since there is less time between each payment, a part of the capital of the mortgage (hypothèque) 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 appear 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 making any increase in payments. So, if it is at all possible, make your payments weekly, or at least every two weeks - prêt hypothecaire.

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 accumulated 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% per year before taxes.

It is important to pick the right 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.

Article Source: http://higradesearch.com

Gregory is an Accredited Mortgage Professional (AMP). To get more information on mortgage loans - prêt hypothécaire, please visit: Informezvous.com - hypothèque

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