Types of mortgage payments
Mortgages paid weekly, bi-weekly and semi-monthly are supposed to
save borrowers thousands of dollars of interest. They do - but not always.
And that can be an unpleasant surprise to the unwary. Despite what many
people assume, just because a mortgage is paid faster than monthly does
not automatically result in significant savings. What really matters
is how the amount to be paid is determined.
Without any standards or guidelines on how they should be calculated,
three different types of fast-pay mortgages are being offered by lenders.
- The accelerated payment mortgage does what borrowers expect:
significantly reduces the high cost of mortgage financing and the
time needed to fully pay it off.
This type of mortgage ensures that an extra monthly
payment will be paid each year in addition to the regular
payment. Every penny of that extra payment is used to
reduce the outstanding principal. In turn, this lowers
the total interest payable for the loan.
- The regular payment mortgage, is a pale alternative that accomplishes little.
In this type of mortgage no extra
payments are made to the lender each
year. As the regular annual payment is divided into
smaller pieces, it does not save borrowers much money.
- The minimum amortized weekly payment mortgage,
is nothing more than a shuffling of the deck.
Where a mortgage is paid weekly, bi-weekly, semi-monthly or monthly but the payment is calculated using a 25-year
amortization; the least effective type of fast-pay
mortgage.
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