Paying more frequently does not necessarily pay down mortgages faster - Small businessess from 1 to 80 employees outsource your payroll management to us and let us worry about your payroll processing.
RSS Follow Become a Fan

Delivered by FeedBurner

Recent Posts

Tax changes to expect when you’re expecting
2016 Tax Tips for 2015 Filing Year
From Proprietorship to Corporation - When is the Best Time to Incorporate?
Tax Specialists Brief your Clients About CRA Fraud And E-Mail Scams
Bank of Canada cuts rates again

Most Popular Posts

Help your teenager build credit responsibly
Being an Executor of an Estate
Student Line of Credit
Principal Residence Exemption


aliko nutrition store- isotonix
aliko payroll services
canada revenue news and videos
canadian news
Cross border Tax
Disability awareness and Benefits for disabled
estate planning
Home Car Insurance
Income Splitting Strategies in Retirement
kids and money -set your children up for financial success
life insurance
on line safety tips
online safety tips
Real Estate - Investments / Retirement
Retirement planning
Save your money
small business planning
Tax Information for Students
tax news
tax planning
Tech news


January 2016
July 2015
May 2015
April 2015
February 2015
December 2014
November 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
July 2013
June 2013

powered by


Paying more frequently does not necessarily pay down mortgages faster

Paying more frequently does not necessarily pay down mortgages faster
Paying more frequently does not necessarily pay down mortgages faster
Written by Jim Yih
 ( Mortgage - It comes from France, mort in French means death. And mortgage has an ironic twist to it as it means to pay until death! )
One of the biggest misconceptions about paying down mortgagesis the notion that if you pay weekly, biweekly or twice a month instead of paying your mortgage monthly, you will save a lot of money. To illustrate my point, let’s take a look at three brothers – Mark, Tony and Bill. Let’s assume they each have a $100,000 mortgage amortized over 25 years at 6%. Mark elects to pay his mortgage monthly, Tony pays his mortgage twice a month and Bill elects to pay his mortgage bi-weekly. Let’s see how the brothers fared after 25 years.
Monthly vs twice a month
On Mark’s $100,000 mortgage, he pays $639.81 per month. After 25 years, he will have paid off that $100,000 by making a total of $191,943 in payments.
Tony, on the other hand pays twice a month. If Tony pays exactly half of Mark’s payment, he would pay $319.91 twice a month instead of paying $639.81 and he would save a whopping $547 of interest over 25 years. Paying more frequently does not make a significant difference.
Does bi-weekly make a difference?
Let’s bring Bill into the picture. Bill makes bi-weekly payments which means he will make 26 payments over the course of a year. If we simply take Mark’s monthly payment of $639.81 he would pay a total of $7677.72 over the year. If we take $7677.72 and divide by 26 payments, Bill would have to make payments of $295.29 every 2 weeks.
By making more frequent payments of $295.29 every 2 weeks, Bill will save more than twice as much as Tony with $1248.60 in interest saved over the 25-year amortization period. But again, the savings is still pretty insignificant.
Three ways to pay less on your mortgage
Paying your mortgage more frequently does save you some money but real benefit comes in three other strategies.
1.       Lower interest rate. In the example of the brothers, I used a 6% interest rate. Using a 5% interest rate figure will save the brothers up to $17,480 of interest over the 25 years. That’s much more significant than the $500 to $1500 we were talking about by paying more frequently. To get lower rates, consider shopping around for the best rate, barter with your institution for a lower rate or consider shorter-term variable rates instead of locking in for the long term.
1.       Shorter amortization. Most people stretch out the amortization period for as long as they can to keep payments as affordable as possible. Let’s look at Mark again with his $639.81 monthly payments based on a 25-year amortization. On a 20-year amortization, Mark’s payments would go up to $712.19 per month. With higher monthly payments, Mark would save over $21,000 in interest on the same $100,000 mortgage. If keeping payments the same were important, Mark could go out and borrow $90,000 on a 20-year amortization instead of $100,000 on a 25-year amortization and have the same $640 per month payment. I guess the point here is to live within your means and buy a house or condo you can afford.
1.       Extra payments. Let’s look at Bill’s situation again. If Bill paid the same $319.91 bi weekly payment as his brother Tony (instead of $295.29), he would save $16,951.20 of interest over the amortization. Now that’s significant. The difference in interest savings comes from the fact that Bill makes two extra $319.91 payment every year. In fact those extra payments will help Bill to pay off his mortgage 4 years sooner than his other brothers.
Most mortgages have provisions to allow for extra payments like doubling up payments or paying an extra lump sum towards the principal balance. Whatever the case, making extra payments makes a huge difference to paying down your mortgage faster and paying less interest to the banks.
Combining these strategies can make an even bigger difference. The good news is it doesn’t take much to make a big difference in savings. All it requires is a little discipline to become mortgage free a lot faster.

0 Comments to Paying more frequently does not necessarily pay down mortgages faster :

Comments RSS

Add a Comment

Your Name:
Email Address: (Required)
Make your text bigger, bold, italic and more with HTML tags. We'll show you how.
Post Comment