Little “White Lies” about Pre-payment Options
Toronto, Aug 10, 2007
Kuljit Singh, Accredited Mortgage Professional
Your banker and your smart brother-in-law have told you, “make bi-weekly payments and save thousands in mortgage interest!” So, weekly payments should save even more? How about daily payments? Are the banks not allowing daily payments because they would never make money on a mortgage?
The moral of the following story: it is not how many times you pay; it is how much you pay that reduces your mortgage balance.
This is the usual example you are shown how bi-weekly payments “save lots of money:”
Your mortgage starts at $300,000. It has a new 35 year amortization. Your five year interest rate is 5.40%. Your regular monthly payment would be $1,579.88. You are shown a bi-weekly payment of $789.99, which is half a monthly payment.
If rates stay the same throughout your mortgage, the bi-weekly payment will pay off the 35 year mortgage in just over 28 years and four months. That’s a lot of savings!
And, weekly payments of $394.97 will pay the 35 year mortgage off in just under 28 years and three months.
Wait a minute. I am paying twice as many times and in almost 30 years there is only about a month and a half payments saved when comparing bi-weekly and weekly? What is wrong with this picture?
The truth lies within the math:
Half a monthly payment paid bi-weekly (26 times per year) is equal to making 13 payments per year. You are paying $789.99 x 26 = $20,520.76 per year. $20,520.76 per year divided by 12= $1710.06. This is your average monthly payment. $394.97 per week is about the same paid during the year.
And, what if just you pay $1710.06 per month to equal $20,520.72 per year? The amortization is just under 28 years and five six months. It is a difference of about three months in almost 30 years of payments compared to the weekly payment strategy. By the way, daily payments of $51.95 ($1579.88 X 12 / 365): the amortization is just over 34 years nine months.
Do weekly or bi-weekly “accelerated” if it makes budget sense to pay 13 payments per year. Or, ask for bi-weekly or weekly payments that equal 12 payments only per year to match your pay periods. Don’t plan to spend all your investment money just to reduce a debt you have at the lowest rate of interest.
For more information, call Mortgage Alliance AKAL Mortgages Inc. at (416)
621-1300 or email at info@akalmortgages.com.