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If you’re a homeowner, you’re well aware of how mortgage payments just seem to go on forever. A mortgage is typically a decades-long commitment, with regular payments due like clockwork. Like most homeowners, you’ve probably given some thought as to what you can do to free yourself of mortgage payments earlier than the date noted in your mortgage contract. Luckily, there are options available that can help you accomplish this.
If your goal is to pay off your mortgage quickly, a crucial factor you need to consider is your payment frequency. In Canada, two of the most popular payment schedules are bi-weekly and monthly, but there are others available as well. Read on to find out how choosing the right one can help you accelerate your payment process, allowing you to become mortgage-free sooner rather than later.
Typical mortgages generally require one payment a month. This is equal to 12 payments a year. If a consumer has a typical 30-year mortgage with fixed rates, it will take about 360 payments to pay off the loan in full.
Mortgage payments are split into two parts. One portion is designated for the principal and the portion is designated for the interest. The principal is applied towards the balance of the loan while the interest is the cost for borrowing money from the bank. Generally, a bigger portion of the payments goes towards the interest, but as the loan matures, the balance between the interest and principal shifts. However, during the earlier part of the mortgage, the interest portion is much larger. This is why after only 5 years of repayment, the balance of the mortgage has barely been paid at all.
Find out if you should pay your property taxes through your mortgage.
Your mortgage payment consists of two parts: the principal and the interest. The payment frequency you choose will impact the amount of time it’ll take for you to fully pay off your principal, as well as the amount of interest you’ll end up paying. You can select from five different payment frequencies:
The most common way of paying a mortgage is with monthly payments. Under this method, you’ll make a single payment every month, usually on the 1st, for a total of 12 payments per year. For example, if your mortgage payment is $1,200 per month, you’ll pay $14,400 in total over a year.
Though paying once a month is convenient for many homebuyers, a major drawback is the large amount of interest that accrues between payments. Following a monthly payment schedule is also the slowest way to pay off your mortgage.
Bi-weekly payment schedules are quite prevalent. Many homeowners receive a paycheque twice a month, so using this payment plan allows them to time their incoming cash flow with their mortgage payment. Bi-weekly payment schedules are determined by multiplying your monthly mortgage payment by 12 and then dividing by 26. You’ll make a total of 26 payments per year under this payment method. Using the previous example, this means you’ll pay $553.85 every two weeks. At the end of the year, your total payments still add up to $14,400.
Bi-weekly payments won’t help you pay off your mortgage quicker. Essentially, the only significant difference between monthly payments and bi-weekly payments is that the latter saves you a little bit of money in interest.
Bi-weekly accelerated payments are like bi-weekly payments in that you make 26 payments per year. However, with a bi-weekly accelerated schedule, the amount you pay each period is slightly higher. The payment amount is calculated by dividing your monthly payment by two, then multiplying by 26. For example, if your monthly payment is $1,200, then this would result in a bi-weekly payment of $600. If you make 26 of these payments, your total amount paid during the year will be $15,600.
Under a bi-weekly accelerated plan, you end up making the equivalent of one extra monthly payment per year. Also, you save a substantial amount in interest costs. A bi-weekly accelerated plan is your best choice if you intend to pay off your mortgage as fast as possible.
A weekly mortgage payment frequency requires you to make regular payments every week. The payment amount is determined by multiplying your monthly payment by 12 and then dividing it by 52. You’ll make a total of 52 payments per year under this payment plan. Continuing with our example, if your monthly payment is $1,200, this translates to 52 payments of $276.92 each.
While contributing payments every week may seem like a sure-fire way to quickly extinguish your mortgage, it’s nearly identical to making monthly payments. At the end of the year, your total payments still equal $14,400. While you benefit from decreased interest costs, these savings over the long run are negligible. Weekly mortgage payments won’t shave any meaningful time off your mortgage.
Accelerated weekly payments commit you to 52 payments per year, so they’re similar to regular weekly payments. The difference is that under an accelerated weekly plan, each payment is slightly higher. The payment amount is determined by dividing your monthly payment by four, then multiplying by 52. For example, if your monthly payment is $1,200, then this would result in a weekly payment of $300. If you make 52 of these payments, your annual total will be $15,600.
A weekly accelerated plan allows you to make the equivalent of one extra monthly payment per year. Muck like bi-weekly accelerated payments, you’ll save a significant amount in interest costs and pay your mortgage off sooner.
Below is a comparison of the total payment amount expected under different payment frequencies. This example assumes a $220,000 mortgage with a 4% interest rate, 5-year term and has a 25-year amortization period.
|Payment Method||Payment Amount||Number of Payments In A 5-Year Term||Total Interest Paid In A 5-Year Term||Total Principal Paid In A 5-Year Term|
Here’s a couple of other tactics you can employ to save on interest costs and pay your mortgage off sooner.
A 20/20 mortgage prepayment feature enables you to ramp up your mortgage payments. Under this option, your lender will permit you to:
Utilizing this prepayment privilege is a wise move if you can afford it, as it can knock years off your mortgage and save you a tremendous amount in interest. The rules governing prepayments vary from lender to lender, so be sure to check your mortgage agreement for details.
A no-closing-cost refinance is a type of refinancing where you don’t have to pay the closing costs when you’re issued a new mortgage. Closing costs are expenses that accompany the refinancing process and can include loan origination fees, appraisal fees, registration fees, legal fees, and others.
Though you’re not responsible for paying closing costs upfront, they don’t simply disappear. Your lender will account for the expenses in one of two ways:
Depending on your lender’s policy, you may be allowed to choose the option you prefer. Realize, though, that whatever option you select will increase your mortgage payment’s size, so ensure you can handle the extra amount that’s tacked on.
No-closing-cost refinancing is beneficial if you expect to stay in your home for only a few years, as little interest will accrue on the mortgage. Once you sell your home, you could realize thousands in saved interest costs. If you intend to live in your home for an extended period, you’ll likely end up paying much more than if you settled the closing costs as an upfront lump-sum payment.
Putting aside the fancy calculations involved in bi-weekly payments, when mortgage rates are low, it might be time to get a whole new mortgage. Extra payments might speed up loan repayment, but not as fast as a no-closing cost refinance can. If consumers do that, they can put some of that monthly savings back into the loan’s balance and the payoff date continues to shrink even more.
When lenders present different repayment options, it’s best for consumers to research each option carefully. Some terms might look good on paper, and the math might add up perfectly. However, that doesn’t mean the repayment terms being offered are the only option available. Consumers should do a little research and think outside the box. There are many repayment strategies, and different ones work best for different people.
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