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Bi-weekly payment myth… it doesn’t pay your mortgage off faster.

RRSP home buyers planFor years, we’ve been told to pay our mortgage bi-weekly. Magically, it will  pay your mortgage off faster.  Hmm, let’s put that to the test.

(SPOILER ALERT!)  Around 6 yrs ago, I wrote an article showing some simple but effective math to explain this.   I’m constantly getting emails from my readers asking me what they should do..obviously, a popular topic.

Let me also say, there is merit to paying bi-weekly…I’ll explain further on.

HISTORY OF BI-WEEKLY PAYMENTS

Back in the mid 90’s, there was a huge marketing blitz by the Big Banks that promoted making bi-weekly payments instead of the traditional monthly payments.   The sales pitch was that you could save huge amounts of money and pay your mortgage off much faster….save 4 or 5 years off your amortization…. Sound familiar?   Well, BI-WEEKLY PAYMENTS DON’T REALLY SAVE YOU ANYTHING!

And I’ll prove it…. here’s the straight facts! Continue reading “Bi-weekly payment myth… it doesn’t pay your mortgage off faster.”

Lower rate = Lower payment and a Lower balance in 5 years!

Mortgage Burning1 We all know that a lower interest means a lower monthly payment.   But did you know that a lower interest rate means you will also owe less when your mortgage comes up for renewal?    This has been overlooked by consumers and experts alike.  I haven’t seen any articles covering this.  And it should change how you choose your next mortgage product.

It all has to do with the effects of compounding interest.   Let’s take a look at 2 borrowers, each with a $400k mortgage.  Borrower 1 is Mary.   Borrower 2 is Dave.   Mary has today’s 5 yr fixed rate of 3.29%.   Dave has the more normal rate of 5.50% (the rate most experts think we will see in the next 3 to 5 yrs).    We’ll amortize both mortgage over a 25 yr term.

Dave’s mortgage has monthly payments of $2441 and a balance owing of $356,749 at the end of 5 years.   Mary’s mortgage has monthly payments of $1953 and a balance owing of $343,728 at the end of the first 5 years.  Notice the difference in the balance owing after 5 years.    We are talking about a $13,021 difference.  That’s the effects of compounding interest. Continue reading “Lower rate = Lower payment and a Lower balance in 5 years!”

Do bi-weekly payments save you money?

Back in the mid 90’s, there was a huge marketing blitz by the Big Banks that promoted making bi-weekly payments instead of the traditional monthly payments.   The sales pitch was that you could save huge amounts of money and pay your mortgage off much faster….save 4 or 5 years off your amortization…. Sound familiar?   Well, BI-WEEKLY PAYMENTS DON’T REALLY SAVE AS MUCH AS YOU THINK!

And I’ll prove it…. here’s the straight facts!

Let’s use a $200,000 mortgage with a 25 year amortization, a 4.00% interest rate and a 5 year term.

MONTHLY PAYMENTS $1,052.04.  MORTGAGE BALANCE AT END OF 5 YEARS $174,107.86.

Now let’s calculate bi-weekly payments and the balance remaining at the end of the 5 year term.

BI-WEEKLY PAYMENTS $485.55.  MORTGAGE BALANCE AT END OF 5 YEARS $173,885.20

So you end up reducing your balance by only $222.66 over a 5 year period... Not much of a benefit…you really aren’t paying your mortgage off sooner.

You may have seen options by your Lender or Bank to pay an ACCELERATED PAYMENT.   This simply means you increase the amount you pay every month…  The normal acceleration formula is to make one more month’s worth of payments every year but spread it out over the 12 months… I’ll show you.

LET’S USE THE SAME MORTGAGE OF $200,000, 25 year amortization, 4.00% interest rate and a 5 year term.

ACCELERATED MONTHLY PAYMENT $1,139.71.  MORTGAGE BALANCE AT END OF 5 YEARS $168,300.27.

You end up with a balance that is $5,807.59 lower at the end of 5 years…but don’t forget, you paid and extra month’s worth of payments every year during those 5 years, totaling $5,260.20.  So the net benefit is really $547.39….

Now let’s look at ACCELERATED BI-WEEKLY PAYMENTS of $526.02….the  MORTGAGE BALANCE AT END OF 5 YEARS IS $168,121.95.

The net benefit is a little better… $725.71…

BOTTOM LINE…. increase your payments and you’ll pay your mortgage off sooner…go with a bi-weekly ACCELERATED payment… it is a better choice.. bi-weekly or weekly payments are not a mysterious formula for paying your mortgage off sooner… It’s the INCREASED PAYMENT that helps you pay it off sooner…… After all, the best mortgage is no mortgage.

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