When setting up your mortgage, one surprisingly important question is how often would you like to make your mortgage payment? It may not seem like a big deal; however, deciding on how often you pay your mortgage could be a bigger deal than you think. Some options may be more convenient, and other options may have a savings. One option may have a larger payment, while another option has a lower payment. What option is best for you?
How much you Save with Different Payments
When reviewing over the numbers we will take several situations, an average mortgage, a large mortgage, and a small mortgage. The first example is an average mortgage.
Example 1
Mortgage Size: $200,000
Interest Rate: 4%
Amortization: 25 years
Monthly
Payments: $1,052.05
Amortization Interest Savings vs. Monthly Payment: $0
Semi-Monthly
Payments: $526.03
Amortization Interest Savings vs. Monthly Payment: $448.78
Bi-Weekly
Payments: $485.56
Amortization Interest Savings vs. Monthly Payment: $1,241.20
Weekly
Payments: $242.78
Amortization Interest Savings vs. Monthly Payment: $1,444.19
Example 2
Mortgage Size: $500,000
Interest Rate: 4%
Amortization: 25 years
Monthly
Payments: $2,630.11
Amortization Interest Savings vs. Monthly Payment: $0
Semi-Monthly
Payments: $1,315.06
Amortization Interest Savings vs. Monthly Payment: $1,115.59
Bi-Weekly
Payments: $1,213.90
Amortization Interest Savings vs. Monthly Payment: $3,103.00
Weekly
Payments: $606.95
Amortization Interest Savings vs. Monthly Payment: $3,610.49
Example 3
Mortgage Size: $100,000
Interest Rate: 4%
Amortization: 25 years
Monthly
Payments: $526.03
Amortization Interest Savings vs. Monthly Payment: $0
Semi-Monthly
Payments: $263.02
Amortization Interest Savings vs. Monthly Payment: $226.51
Bi-Weekly
Payments: $242.78
Amortization Interest Savings vs. Monthly Payment: $620.60
Weekly
Payments: $121.39
Amortization Interest Savings vs. Monthly Payment: $722.10
It is easy to see that the savings over the course of the mortgage amortization is greater if the mortgage balance is higher or the interest rate on the mortgage is higher. It is more effective to get a lower interest rate upfront or to pay down the mortgage faster using prepayments. What better ways to increase the amount of interest savings?
Accelerate Payments or Non-Accelerated Payments
Selecting a certain type of payment shows a low amount of savings over the course of a 25 year term; however, how does an accelerated payment compare to a non-accelerated payment? An accelerated payment is done either as a bi-weekly or a weekly payment. The way that a accelerated bi-weekly payment is calculated is by taking a monthly payment and dividing it by 2. The accelerated weekly payment is calculated is by taking a monthly payment and dividing it by 4. The following examples show the comparison in savings:
Example 1
Mortgage Size: $200,000
Interest Rate: 4%
Amortization: 25 years
Bi-Weekly Accelerated
Payments: $526.03
Amortization Interest Savings vs. Monthly Payment: $16,972.35
Weekly Accelerated
Payments: $263.02
Amortization Interest Savings vs. Monthly Payment: $17,155.52
Example 2
Mortgage Size: $500,000
Interest Rate: 4%
Amortization: 25 years
Bi-Weekly
Payments: $1,315.06
Amortization Interest Savings vs. Monthly Payment: $42,425.87
Weekly
Payments: $657.53
Amortization Interest Savings vs. Monthly Payment: $42,875.51
Clearly, it is easy to see that by paying more to your premium, it allows you to pay down your mortgage a lot faster and pay off your mortgage a lot quicker. Choosing an accelerated payment is almost always an effective way to pay down your mortgage.
What Choice of Mortgage Payment is Best?
When choosing a mortgage payment, two factors must be considered. The first factor is when you get paid. If you get paid weekly, then you should consider paying your mortgage weekly. If you get paid monthly, then it may be a good idea to pay down your mortgage on a monthly basis. The second factor is do you have the ability to pay more to your mortgage. If you have the ability to pay more, then it would be a much better idea to increase your mortgage payments, then to change the frequency that you pay the mortgage. The more you pay your mortgage, the faster you will pay off your mortgage in full. Consider this info when choosing what type of payment you want for your mortgage.
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#1 by James at December 21st, 2009
Be very careful when choosing your mortgage and dont get dragged in by cheap mortgage deals. You may get a cheap interest rate now but the difference of 0.05% of $200k would be $100 a month and the interest rate is destined to go back up.