Christian finance and consumer credit counseling & debt management
Before You Apply for a Mortgage
Amortization
The amortization is the length of time it takes to pay off a mortgage, assuming that the interest rate and payment amount do not change, that all payments are made on time and that no additional payments are made. Typically, the longest amortization period is 25 years, although some institutions may allow a longer period. It is to your advantage, however, to choose the shortest amortization period that you can afford. This will save you thousands of dollars in interest in the long run. The following table shows how much interest is paid (over the entire amortization period) on a $150,000 mortgage, assuming a constant annual interest rate of 6.45 per cent.
Example - Amortization vs. Interest Paid
Mortgage amount
Amortization
Monthly payment
Interest paid
$150,000
25 years
$1,000
$150,060
$150,000
20 years
$1,105
$115,550
$150,000
15 years
$1,295
$83,200
$150,000
10 years
$1,690
$53,150
Term
The amortization of a mortgage is divided up into smaller time periods called "terms". Mortgage terms usually range from six months to five years, but some institutions will offer seven- or 10-year terms. The term is the period of time during which, with fixed-rate mortgages, the interest rate and payment amount are fixed. With variable-rate mortgages, the payment amount may, or may not, change; you should review your agreement to check when the payment amount may change. At the end of the term, you can renew your mortgage for a new term, at prevailing interest rates.
Generally, the longer the term, the higher the interest rate. Because it is not possible to know what the interest rates will be over any given period of time, many consumers seeking certainty choose a longer term with a fixed interest rate so that they know in advance, at least for a specified period, how much they will have to pay for their mortgage. This helps them to plan their finances better and enhances their feeling of security. However, during periods when interest rates are expected to fall, many consumers choose variable-rate mortgages so they can take advantage of lower rates without renegotiating their mortgage.
Payment Options
Most financial institutions offer a number of payment options (monthly, semi-monthly, bi-weekly, accelerated bi-weekly, weekly, and accelerated weekly payments). Although these options may all seem the same, some payment methods such as accelerated weekly and bi-weekly payments can save you a lot in interest charges, compared with regular monthly payments.
The following table illustrates the savings in interest you can get with various payment options. It assumes that you have a mortgage of $150,000, amortized over 25 years, with a constant interest rate of 6.45 per cent. As you will note, choosing the accelerated weekly or bi-weekly payment option can save you thousands of dollars in interest charges over the duration of your mortgage.
Example - Interest savings resulting from various payment options*
Payment
Frequency
Amortization
Interest paid
Interest saved
Monthly
$1,000
Every Month
25 years
$150,060
--
Semi-Monthly
$500
24 times a year
25 years
$149,660
$400
Bi-Weekly
$460
26 times a year
25 years
$149,630
$430
Weekly
$230
52 times a year
25 years
$149,455
$605
Accelerated bi-weekly
$500
26 times a year
20.7 years
$120,650
$29,410
Accelerated weekly
$250
52 times a year
20.6 years
$120,300
$29,760
* Note: For illustration purposes, numbers in this example
have been rounded off. Each institution may calculate interest
differently. The interest paid and saved was calculated
over the period of amortization of the mortgage.
Monthly
With monthly payments, funds are taken from your account on a specific day once a month (or 12 times a year); for example, on the first day of each month. This type of payment does not result in any interest savings when compared to the other payment options that follow.
Semi-monthly
If you choose the semi-monthly payment option, half of your monthly payment amount will be taken from your account twice a month (e.g., on the 1st and 15th of each month), and you will make 24 semi-monthly payments a year. This type of payment does not result in any significant interest savings.
Bi-weekly (non-accelerated)
With the non-accelerated bi-weekly payment, you make a payment every second week (e.g., every second Thursday). Since there are 52 weeks in a year, you will make 26 payments a year (52 weeks ÷ 2). To calculate the amount of your bi-weekly payments, multiply your monthly payment by 12 and divide it by 26 ($1,000 × 12 ÷ 26 = $461.54). This type of payment does not result in any significant savings in interest.
Weekly (non-accelerated)
With the non-accelerated weekly payment, you make a payment every week (e.g., every Thursday). Since there are 52 weeks in a year, you will make 52 payments in a year. To calculate the amount of your weekly payments, multiply your monthly payment by 12 and divide it by 52 ($1,000 × 12 ÷ 52 = $230.77). This type of payment does not result in any significant interest savings.
Accelerated bi-weekly
The accelerated bi-weekly payment allows you to pay half of your monthly payment every two weeks (e.g., every second Thursday). Since there are 52 weeks in a year, you will make 26 payments a year (52 weeks ÷ 2). By doing this, you make the equivalent of one extra monthly payment a year, which means you pay off your mortgage faster and save interest charges.
Accelerated weekly
If you choose the accelerated weekly payment, one-quarter of your monthly payment amount will be debited from your account every week (e.g., every Thursday). Since there are 52 weeks in a year, you will make 52 payments a year. As with the accelerated bi-weekly option, you make the equivalent of one extra monthly payment a year, which means you pay off your mortgage faster and save on interest charges.
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