INCREASING THE FREQUENCY OF YOUR MORTGAGE PAYMENTS
I know you are still getting to know me. However, I hope you have realized by now that my goal
is to not just impart as much knowledge as possible but to also save you time,
effort, and money by showing you the important things that many miss. Of course if you see any value please share it, and pass it on, as so many are embarrassed to ask until its too late. I have had clients come into my office 69 years old and wanting to retire in a year. He was renting, with no savings at all and wanted to know his options. His life would have been easier if I caught him years before. This will be a small part of my Alberta Mortgage Broker legacy. Just knowing that I helped someone gives me satisfaction. So long as one person
remembers one thing, and starts a ball rolling, it will all have been worth it. Every avalanche begins with a single snow flake after
all.
We will go through it all, remove the doubt over seeing page
after page of contracts, and show you the key choices that will save as much
money as possible. This is just one of the ways to save money. If you know all this stay tuned to next week and I will go over another method to save.
Simply your mortgage payment frequency is how often you pay
your mortgage payment. It’s not just
throwing extra into the mortgage, it’s your actual
scheduled payment that can be set up for any day of the month with a wide range
of frequencies to choose from. We will
look at the differences, and benefits of each payment frequency shortly as this
is an instrumental part of saving you money and possibly the one tool that is
often overlooked.
There are a lot of aspects to consider when deciding how to
pay off your mortgage debt, but the effort will be well worth it. It’s all
about establishing an effective mortgage strategy, and with a great strategy you
can save over the life of your mortgage and become
mortgage free years sooner. In the charts below a client would saves almost $50,000 just with this one technique. You have
to think of your mortgage as a chess opponent in which you have to plan ahead,
it’s not just about scheduling your payments to coincide with your pay-cheques. My goal after all is to help you think more
than one move ahead and go from defensive to playing a little more offensive.
What are your options when it comes to mortgage payment
frequency?
Monthly
Semi-monthly
Bi-weekly
Accelerated bi-weekly
Weekly
Accelerated weekly
With the most common being the 1st of the month, because
it’s comfortable. Mostly because that
was when rent came out of the account.
You know there are many options, and you may be thinking by
now that accelerating anything from weekly or bi-weekly payments should make it
go faster, but can it substantially reduce the cost of interest you
pay as well as reduce the life of your mortgage?
When you select an accelerated weekly or the accelerated bi-weekly
payment option, you are essentially making the equivalent of one additional
monthly payment each year which will help pay off your mortgage faster.
If you reduce the principal faster, then you pay less
interest and you pay off your mortgage sooner.
These are the little victories that make me happy. I will try
not to bore you, but we now need to look the payment frequencies a little
closer:
1) MONTHLY Mortgage Payments:
I have mentioned already, this is the most common way of
paying a mortgage. Your mortgage payment
can be any day of the month, so you can pick the 1st of the month,
the 15th, or one of the days your pay cheques land on so it’s easy to
budget, easy to remember. It is so very
simple to remember one date right? This
is the baseline to which all other options are judged. Our goal is pay the mortgage off quicker, to
have the least amount of interest calculated and compounded. More time between payments means more
interest in charged on the outstanding balance. Skip this option and keep on reading!
2) SEMI-MONTHLY Mortgage Payments:
This option gives you the opportunity to magically divide
that one monthly payment into two over the course of a month. It’s true you would be paying off a fraction
of your payment a little bit earlier which will save you a tiny wee bit. At the end of the year you still paid
exactly the same amount as if you would have if you paid it monthly. If your monthly mortgage payment was $2000
dollars then you would be paying $1000 twice a month and studies have shown
that most will coincide with pay cheques on the 1st and the 15th.
3) BI-WEEKLY Mortgage Payments:
This most commonly would happen every two weeks to match
many people’s pay cheques.
To get this payment amount you take your $2000 a month
mortgage payment multiply it by 12 then divided by 26.
Which gives you $923.08, and at the end of the year you
would have paid the exact same amount. Mind you there are two months per year
on any cycle that you will be paying it three times a month. This is still at the lower amount for the
same total.
The amount of savings here is associated with the payment
being made early each month.
4) BI-WEEKLY Mortgage Payments - accelerated:
To accelerate the payment we do not reduce the Bi-weekly
payments by those two extra payments you are making extra throughout the
year. Those two extra payments get put
on the principle.
To get this amount you take your $2000 a month mortgage
payment multiple it by 12 then divide it by 24.
YOU ARE MAKING 26 Payments, so an
extra $2000 gets put on the mortgage principle which is paying down the balance
owing on the mortgage. NO matter how you do your bi-wkly payment at least twice a
year you will have three payments in the month.
Can I explain this a little more?
If your interest is the same regardless of what you do, then
extra money is not going to interest rather right to the principle of the
mortgage. It does work out to twice a
year paying 1.5 times your regular monthly mortgage payment. We know you are trying to pay your principle
off faster, this is the way to go. Just
be mindful that we have to plan ahead for those two months a year where there
is an extra payment. It can be
relatively easy if you are on a Bi-weekly pay period. A tad trickier if you get paid on any other schedule.
5) WEEKLY Mortgage Payment:
A very minor amount of savings are realized primarily due to
three quarters of your payment being made early each month. Not very popular
and used to match pay cheques and to get the lowest possible payment
amount.
To get this amount you take your monthly mortgage amount times
12 then divide by 52.
2000 X 12 / 52 = $461.54
This does not make much of a difference in relation to
reducing your principle amount as you are still paying per year $24,000 Its just interest savings on the paying early.
6) WEEKLY Mortgage Payment - accelerated:
Similar to the other accelerated program the extra payments
throughout the year would equate to an extra four payments and not be reduced.
For this example the weekly payment would be $500 and if you
times that by 52 you get $26,000 for an extra $2,000 being applied to the
principle.
Can I explain this a little more?
There are certain months in which there are 5 weeks in the
month. Which means in those months you
will have to make 5 payments in that month. An extra payment can save you tens
of thousands in interest and take years off of your mortgage over the
amortization of your mortgage. In the chart below this saves you $47,228 over the course of your mortgage. Which might I am sure you could find a better use for that paying interest.
Conclusion: You are not going to appreciate this
without a chart. So here one is using
the Benchmark rate of 5.34% with a 25 year amortization, with a 5 year term and
a mortgage amount of $333,000 monthly payment amount for this just a hair over $2,000
Check my numbers if you want, but as illustrated the most
valuable payment frequencies are the accelerated plans. When shopping
around for your best mortgage rates make sure your lender has those options
available. Often to get you the best
rate all the frills and privileges will be stripped away so be careful. We are talking a couple hundred dollars difference between the none accelerated plans.
Just remember it’s not all about a small
percentage of interest and saving 10 dollars in interest per month. To my clients its a mix of great mortgage rate and great privileges on that mortgage. Every single time it’s a better choice for you to make sure you have that option to pay it down as fast as you want to.
We are dealing with big numbers here, so remember that the longer you
have your mortgage, the more you are paying in interest. Make sure you ask your mortgage broker or lender all the right questions! If you have questions throw them on below! Or call or text me, 403-807-8779
Do you want the free stuff?
Other than all my life's expertise being given to you for free. You can have a mortgage planning guide, or my mortgage management system use the contact box below. Or there is a quick question box on my website you can check out: www.you-mortgage.com
No comments:
Post a Comment