Time and money are the most common currencies we use. I’d like to provide some insight on how to save a little bit of both when buying a home. There are various ways to pay off a mortgage more quickly. I’ll be focusing on accelerated mortgage payments and payment frequency. Payment frequency is choosing monthly, semi-monthly, bi-weekly or weekly payments. Any of these options will result in the mortgage being paid off within 25 years. There’s a common misconception that paying weekly as opposed to monthly will save thousands of dollars. Here’s an example:
A mortgage of $375,000 with a fixed rate at 3.25% compounded semi-annually.
A weekly payment would be $420.29. Over 25 years there would be 1300 payments of $420.29. This would total in the amount of $546,377.00.
A monthly payment would be $1823.13. Over 25 years there would be 300 payments of $1823.13. This would total in the amount of $546,939.00.
As you can see the total savings are not significant. Only adding up to $562.00 over 25 years.
Accelerating a mortgage would be taking the monthly mortgage payment amount and dividing it by 2 or 4 weeks. For this example, I’ll be dividing by 4 weeks.
$1823.13/4 = $455.79
This means that $455.79 is the accelerated weekly payment amount for the mortgage. The reason this amount accelerates your mortgage is because there aren’t only 4 weeks in a month, except February.
12 months x 4 weeks = 48 weeks, but as we know there are 52 weeks in a year, resulting in an accelerated mortgage. Accelerating the weekly mortgage payment only costs a difference of 455.79 – 420.29 = $35.50 a week! Now let’s look at the benefits of spending an extra $35.50 a week.
By making an accelerated weekly payment of $455.79, this mortgage will take a total of 1151.41 payments to pay off as opposed to 1300 payments. This results in the total cost of the mortgage being $524,801.17.
Accelerating payments saves over $22,000, paying off the mortgage in 22.14 years instead of 25. This is a great option if you have the extra cash flow and are comfortable making these higher payments for the mortgage term.