The Myth That Changing Your Mortgage Payment Frequency From Monthly To Weekly Will Save You Ton of Money
Introduction
The belief that changing the frequency of mortgage payments can significantly shorten the amortization period is a common one among homeowners. This article aims to debunk this myth and provide a clear understanding of changing mortgage payment frequencies, shedding light on the actual impact of payment frequency changes and the real benefits of accelerated payments. It’s important to note that while the frequency of payments can have an impact, it’s often less significant than homeowners might think. This introduction sets the stage for a detailed exploration of mortgage payment frequencies, their effects, and the strategies that can truly make a difference in your mortgage amortization, and ultimately understanding how to save money on your mortgage.
The Effect of Changing Payment Frequencies
The belief that simply changing your mortgage payment frequency, from monthly to weekly for instance, will drastically save you money is widespread. However, the reality is that the savings from such a change are often minimal. For instance, consider a $500,000 mortgage with a 25-year amortization and a 5% interest rate, where the payment is made monthly. For the sake of simplifying the calculations, let’s assume that the mortgage rate remains constant over the full amortization period. The total interest paid over 25 years would be $372,409. If you switch your payment frequency to weekly, keeping all other variables constant, your total interest paid over 25 years would be $371,028. This results in a saving of just $1,381 over 25 years, or $55.24 a year, which is only $4.60 per month in savings. Clearly, there’s not much effect in changing payment frequencies. That’s why it is important to understand the numbers behind your mortgage to make decisions that will be beneficial and have significant impact on your mortgage interest savings.
The Truth About Accelerated Payments
The concept of “accelerated” payments was introduced by lenders as a gimmick. Accelerated bi-weekly payments do help pay down your mortgage faster, but this is primarily because they increase the amount of your regular mortgage payment. For example, with a regular monthly payment, you’d make 12 payments of $2,908.02, totaling $34,896.24 annually. With an accelerated bi-weekly payment, you’d make 26 payments of $1,454.01, totaling $37,804.26 annually. This higher payment is set at half of the monthly payment and paid 26 times, effectively making two extra payments each year. It’s important to note that it’s the increased payment amount, not the frequency, that contributes to the faster paydown. The accelerated payment option can be a useful tool for those who can afford the higher payments.
Increasing Your Mortgage Payments
The frequency of your payments doesn’t inherently reduce the life of your mortgage. It’s the increase in the amount you pay that accomplishes this. What this means is that you don’t really need an accelerated payment frequency to save on your mortgage. Homeowners can increase their mortgage payments in any way they like without using the accelerated payment option. This could be by rounding to the nearest $50 or $100, increasing the mortgage amount so that it accounts for 5 or 10% of your gross or net income, or even increasing it by $34 because you are 34 years old, and next year you can increase it by $35, and so on! These strategies allow homeowners to pay down their mortgage faster without being tied to a specific payment frequency. It’s all about finding a payment strategy that works best for your financial situation.
The Impact of Interest Rates on Mortgage Payments
Interest rates play a crucial role in determining your mortgage payments. A lower interest rate means lower monthly payments and less total interest paid over the life of the mortgage. On the other hand, a higher interest rate results in higher monthly payments and more total interest paid. It’s important to keep an eye on interest rates and consider refinancing if rates drop significantly. It’s also important to shop around at the end of your term, to make sure that you are getting the best rate possible.
The Benefits of Regular Prepayments
Making regular prepayments can significantly reduce the amount of interest you pay over the life of your mortgage and can help you pay off your mortgage faster. Prepayments are payments that you make in addition to your regular mortgage payments. They can be done as a lump sum, increases to your regular payments, or a combination of both. They go directly towards paying down your mortgage principal, which reduces the amount of interest you’ll pay over time.
The Flexibility of Prepayments
One of the advantages of prepayments is their flexibility. You can choose to make prepayments at any time, and for any amount (within limits set by the lender). Some people choose to make a prepayment every time they get a bonus or a tax refund. Others set up automatic prepayments every month. The key is to choose a prepayment strategy that fits your budget and your financial goals.
Considerations When Making Prepayments
While prepayments can save you money in the long run, it’s important to consider your overall financial situation. If you have high-interest debt, such as credit card debt, it might be more beneficial to pay that off first. Additionally, some mortgages have prepayment penalties, so it’s important to understand your mortgage terms.
Practical Tips for Mortgage Payments
When it comes to the timing of your mortgage payment, a simple tip is to match it with the timing of your paycheque. This ensures that the payment is taken before you have a chance to spend it, reducing the risk of being short on funds. As for prepayments, the more you pay, the faster you will be mortgage-free. This is the only reason why choosing the accelerated payment frequency option will help you pay off your mortgage faster. It’s all about making your money work for you and finding ways to pay down your mortgage in a way that fits your lifestyle and financial goals.
Conclusion
Understanding your mortgage payment frequencies and the options you have is important when it comes to effective financial planning. It’s not the frequency of payments but the amount you pay that can make a significant difference in reducing your mortgage amortization, which in turn will shorten the life of your mortgage and result in interest savings. By taking the time to understand the ins and outs of your mortgage payments, you can make informed decisions that will benefit you in the long run.
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This article was brought to you by TheBroker.ca Ltd., a mortgage brokerage that is licensed with the Financial Services Regulatory Agency of Ontario (FSRA), which regulates businesses in the financial sector. The Principal Broker Sash Trajkovski has over 20 years of real estate and mortgage experience in the Ontario marketplace. You can verify our licenses by visiting the following links from FSRA’s website: our corporate license and Principal Broker license. Our mortgages services are available to all residents of Ontario. If you’re in Ontario and looking for more personalized advice and information, consider booking your Complimentary Consultation today, and let us help you understand the details that will guide you on your path to a suitable mortgage solution.
Disclaimer: Please note that this information is current as of the date of publication and is intended to be general in nature. It is not intended to provide legal, tax, financial, or other professional advice and should not be relied upon as such. Always consult with a professional for advice tailored to your individual circumstances.
