Little “White Lies” about Pre-payment Options


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 contact a mortgage professional who can give you guidance, ultimately you decide. Be informed, contact me at wpianka@mortgagealliance.com.

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About wojciechpianka

After a few years of studying English and History at the University of Toronto, I decided to transfer to Ryerson University and pursue a Bachelor of Commerce degree. While studying, I worked various jobs where I acquired many skills. Starting as a teller at Scotiabank, I moved on to being a manager of a restaurant, admin staff at a medical clinic, a sales agent for INGDirect and a manager at One King West Hotel. While all these jobs challenged me, I never felt my potential being utilized. Finally in 2008, I completed the Ontario Mortgage Agent Course and signed up with The Mortgage Alliance Company of Canada. This was a great decision, as it allowed me to use the skills I learned working to help people achieve their real estate and financial goals. My passion for real estate and numbers has lead me to becoming a mortgage agent. Growing up in New York City, I always had a fascination of historic buildings and skyscrapers. At 21, I bought my 1st property and have been investing in real estate ever since. I firmly believe thru steady, safe and conservative investing a one can obtain long term financial wealth. One day, I hope to develop the same buildings I help clients purchase.
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