Have you thought of accelerated mortgage payments when determining your repayment options? Ideally, you’ve done your research and shopped around for the mortgage rates with an amortization period that suits your lifestyle and long term plans. But the next step to finalizing your loan is determining your repayment schedule. Many home owners think of the traditional monthly mortgage payment when they think of repayment. But what if you had the option to pay off your mortgage in far less time than you would with traditional payment terms?

Mortgages often stretch out for 25 years or more and many homeowners only scratch the surface of their debt in the first couple of years, paying off mainly the interest before tackling the principal. But this doesn’t always have to be the case. Several options are available to you and can be selected depending on your personal and financial situation. But why wouldn’t you want to enjoy a mortgage-free lifestyle sooner rather than later?

As Frank Torchia, a mortgage specialist with Mortgage Alliance Lending Superstore states, “Especially in an unstable economy, accelerated payments can act as forced saving; planning for your future and increasing your equity by paying down your mortgage more quickly.”

How do accelerated mortgage payments work? Instead of making payments once a month, you make payments every two weeks or every week. So, with an accelerated bi-weekly mortgage payment, over the course of a year, you end up making 26 ‘half’ payments which is the equivalent to 13 ‘full’ payments. If you were on a monthly repayment schedule, you would only make the standard 12 ‘full’ payments. You therefore reduce the payment schedule and save a lot on interest by paying off an extra month a year.

For example, on a $250,000 mortgage at 4% interest, amortized over 25 years, traditional monthly payments would be $1315.05. However, by simply switching to accelerated bi-weekly payments (every two weeks) with payments of $657.52, you could pay your mortgage off within 21 years rather than 25 and save $20,454 in interest! Even better, weekly payments of $328.76 will save $20,680 in interest, and you will be mortgage free in the 20th year.

While accelerated bi-weekly mortgage payments do prove to pay off your mortgage a lot sooner than traditional monthly mortgage payments and saves you thousands of dollars in interest, it may not be for everyone. What works for one person doesn’t always work for another, therefore it is important to look at all of the options available before signing up for one.

What’s the difference between accelerated payments and other mortgage repayment options? Below is a description of the repayment plans available:

Monthly Mortgage Payments

Traditionally, mortgage payments are made monthly. Unless otherwise arranged, monthly mortgage payments involve making the same payment on the same day each month. These payments include both the principal and the interest and the amount of interest being paid off is determined by the interest rate. This is usually the most expensive option as you do not save money on interest fees.

Semi-Monthly Mortgage Payments

With semi-monthly mortgage payments, you make two equal payments on the same day each month. This equals to 24 payments a year. While this option does benefit interest payments, it does not make much of a difference in terms of paying off your mortgage in less time and accumulating less interest compared to making monthly mortgage payments.

Accelerated Bi-Weekly Mortgage Payments

Bi-weekly mortgage payments, or as most often referred to as accelerated bi-weekly mortgage payments, allow you to pay your mortgage off sooner compared to monthly or bi-monthly payments. By making your mortgage payments bi-weekly, you end up paying 26 times in a year as opposed to 24 times in a year. This in turn results in one month extra mortgage payment per year, paying off your mortgage in less time and saving a lot of money in interest. In addition, by making payments on a bi-weekly basis, you can more easily coordinate your payment schedule with your employment pay periods, making payments easier to follow.

Accelerated Weekly Mortgage Payments

Weekly mortgage payments are similar to bi-weekly payments, as you are making more payments throughout the year. With weekly payments, you end up saving yourself thousands of dollars in interest and paying your mortgage off in less time than you would with a traditional monthly mortgage payment plan.

*The chart below further explains the different types of payment plans and the interest you save with each one. (Please note, this chart is based on estimates only. Speak with your mortgage specialist to obtain latest mortgage rates.)

Purchasing a home is the biggest investment you will ever make; an investment towards your future. With accelerated mortgage payments, you are quite literally accelerating to a future of living mortgage free and enjoying financial freedom.

Caroline
PR@RateSupermarket.ca

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Tags: Mortgage payments, Mortgage tips