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Over the past number of years
banks have come up with a rather confusing set of payment frequency options
that have left some mortgage clients a bit disappointed 5 years down the
road.
Rather than the Amortization crushing ‘Accelerated bi-weekly’
plan which a quality Mortgage Broker will discuss with you, clients left to
their own devices run the risk of opting for simply ‘bi-weekly’ payments.
Here is the math;
Let’s use a $100,000 mortgage amount (to make working out your
own numbers simpler) with a 25 year amortization, a 2.74% interest rate and a
5 year term.
Monthly Payments:
$460.01
Ending Balance 60
months later: $85,043.18
Now let’s calculate bi-weekly
payments and the balance remaining at the end of the 5 year term.
Bi-Weekly Payments:
$212.18
Ending balance 60
months later: $85,043.60
The balance is 42 cents higher. This is because you did
not effectively pay anything extra over the 60 months to the lender.
The sum of the annual payments is identical. Now let’s insert
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the word ‘ACCELERATED’
(bi-weekly) into the equation.
Accelerated bi-weekly
Payment: $230.00
Ending balance 60
months later: $82,563.13
Ah-ha, now you have a $2,480.47 lower balance, and you have
paid $163.87 less interest over the 5 years. Excellent!
How did this happen? When one opts for ‘accelerated’ in
the above scenario, the payment increases by $17.82 per payment, or $463.32
per year. For a total of $2,316.60 in additional funds going straight
to the mortgage balance.
The big picture is improved as well, as you have effectively
lowered your amortization from 25 years to 22 years and 5 months.
Shaving 2.5 years off a 25 year mortgage might not seem huge,
but in 22.5 years it surely will make you happy. Imagine having $460.00
more per month (per $100,000 of mortgage balance) to play with for 2.5 years.
If you started with a $300,000 mortgage, then we are talking
about $1380.02 per month X 30 which is a total of $41,400.60. All from
one word ‘accelerated’.
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