When taking out a mortgage there
are several methods of repaying the cost for your home.
1 - Monthly
Mortgage Payments
2 - Bi-Weekly
Mortgage Payments
3 - Weekly
Mortgage Payments
4 - Accelerated
Bi-Weekly Mortgage Payments
5 - Accelerated
Weekly Mortgage Payments
Monthly payments are calculated
for the term of your mortgage so a 25 year mortgage will take 25yrs to
pay off. Sounds obvious, but read on…
Payments made over the 25 years
for a mortgage of $300,000 at 5.5% interest.
Payment
|
Type
|
||||
Monthly
|
Bi-Weekly
|
Weekly
|
Accelerated
Bi-Weekly
|
Accelerated
Weekly
|
|
Payment
Amount
|
$ 1,842.26
|
$ 849.23
|
$ 424.39
|
$ 921.13
|
$ 460.75
|
Total
Payments
|
$552,678.00
|
$551,988.00
|
$551,707.09
|
$508,491.75
|
$ 507,983.97
|
Total
Interest
|
$252,678.00
|
$251,988.00
|
$251,707.39
|
$208,491.75
|
$ 207,983.97
|
Savings
|
0
|
$ 1,360.30
|
$ 1,942.52
|
$ 88,373.50
|
$ 89,983.97
|
Time
to Pay
|
25
Years
|
25
Years
|
25
Years
|
21.27
Years
|
21.21
Years
|
So, if you are interested in
decreasing the number of years to pay off your mortgage – and save money on
interest payments - as can be seen in the above chart the best method is either
of the accelerated mortgage payments. How does this work? Because the monthly
payments are calculated as a 25 year mortgage with one payment every month and then
for Accelerated Bi-Weekly payments simply divide the monthly payment by 2 and
for Accelerated Weekly payments are divided by 4. Although at first glance it
might seem that the amount paid monthly would be the same but they are not. For
example, if are making one payment per week, you are actually making 4 payments
every 28 days instead of every 30.5 days (which is the average number of days
in a month). This means you are paying off your mortgage a little bit faster
every month, which lowers the interest you will pay over the life of the
mortgage These accelerated payment methods can reduce your mortgage by up to 4
years and save you tens-of-thousands of dollars in interest.
Another way of reducing interest
is using a variable rate mortgage which can be as low as 2.25%. But if the bank
rate climbs, the interest rate would increase accordingly so would your payment.
To guarantee that you do not pay excessive interest rate some banks will give
you a mortgage term interest say 5.5% and a variable rate of say 2.25%. You
will make mortgage payments based on the 5.5% but the interest is based on the
2.25% rate. While the variable rate is lower than the term rate you will be
paying down your mortgage principal faster. And, if the variable rate increases
above the term rate you convert to the mortgage term rate 5.5%. This could
greatly reduce the length of the mortgage and protect you from high interest
increases, so it is worth asking you bank if they offer this kind of
protection.
Some mortgages allow you to make
a lump sum payment, or pay a percentage of your loan, yearly; also some allow
you to increase your mortgage payment. All of these will bring down the length
of time of your mortgage and save thousands of dollars in interest.
For first time buyers the
purchase of a home can be quite daunting so you have to make sure that you are
aware of all expenses to be paid, normally a bank requires 20% down payment,
and there are lawyer’s fees, maybe land/stamp duty taxes and other related
fees, these could cost from $5,000 to $12,000, in some states you could request
from the seller of the home help towards the closing costs the amount depends
on your closing costs. If you are buying a condo there are monthly maintenance
fees so these have to be taken into consideration for the monthly expenses. For
information on other “hidden costs” when purchasing a property see the article “First
Time Buyers” on our website.
Courtesy of www.real-estate-investor-software.com
