Deciding on a payment structure for your mortgage loan is an important endeavour that requires some research. You want to ensure you’re paying your mortgage down as quickly as possible – and, therefore, building home equity – in an affordable manner that doesn’t put you in a cash-strapped position each month.
We’ve compiled some details for you below that outline your mortgage payment options to help you make your best frequency selection.
- When selecting your mortgage payment frequency, be sure to strike a balance between paying your mortgage off as quickly as possible and ensuring your monthly cashflow remains comfortable
- Your payment frequency is determined when your mortgage is first arranged but you may be able to change it at a later date
- Accelerated payment options amount to an additional monthly payment per year. Over time, this can save you thousands of dollars in mortgage payments
What types of payment can I make?
Determining your payment frequency will also depend on your financial obligations in addition to your mortgage as well as your comfort level. And while there are many advantages to committing to a more frequent payment, you should select the frequency best suited to your financial situation.
In the early stage of your mortgage, your lender will apply a larger portion of the payment towards the interest, with the remainder going towards the principal. Over time, however, an increased portion will be applied towards the principal until it’s paid off in full. Lenders use a standard formula to calculate these figures to ensure the right amount is paid in both interest and principal.
As you increase – accelerate – the frequency of your mortgage payments, you reduce the principal amount owing on your mortgage quicker and, therefore, pay less interest throughout your time as a home owner. See: Understanding Your Mortgage Payment
Your payment frequency is determined when your mortgage is first arranged but you may be able to change it at a later date, usually without having to pay a fee. It’s best to check in with your lender to ensure you have the option to change the frequency at a future date if you so choose.
In addition to increasing your mortgage payment frequency, there are several different ways to become mortgage-free faster. Be sure to ask about pre-payment privileges
Unless you specify a different option, lenders typically assume you’ll be making 12 mortgage payments per year. Payments are made once a month, usually on a day of your choice.
Also referred to as semi-monthly payments, this frequency option totals 24 payments per year. Your monthly mortgage payment is divided into two monthly payments.
Accelerated bi-weekly payments
Opting for this accelerated frequency means you’ll be making 26 payments per year. Payments are made every two weeks. Many people select this option based on the convenience of having payments coincide with employer pay periods.
Accelerated weekly payments
In this case, you’re making 52 payments per year – once every week.
Selecting a variable-rate mortgage has historically proven over time to be more cost-effective for borrowers compared to the less risky fixed-rate option
Difference between regular & accelerated payments
By selecting either accelerated bi-weekly payments or accelerated weekly payments, you’re paying down your mortgage faster as you end up making more payments throughout the year than you would during a monthly or semi-monthly frequency. Accelerated payments are equal to an additional monthly payment per year. Over time, this can save you thousands of dollars in mortgage payments.
Use nesto’s online Mortgage Payment Calculator to help assess the amount of your payments using different options/scenarios.
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