Mortgage 20/20 Scenario : Which 20 More Beneficial

[titleeboy]

Hi

I will be starting mortgage for my new home in coming month of april.
During the life of the mortgage i have two options.

Option A: Increase the weekly payment by 20% (i am paying weekly)

Option B. Prepay the 20% of the Mortgage Amount Taken: Every Year For the Term (Term 3 years)

I presume i may have additional finances and want to put the money in mortgage which option will will be more beneficial to me.

Option A or Option B or It does not matter

Will Look forward for your feedback on this account

titleeboy

[jmc0]

If you have the money, and want to payout faster, go with
Option B. Prepay the 20% of the Mortgage Amount Taken: Every Year For the Term (Term 3 years)

[jerryhung]

Mnn, the 2 mortgages I've dealt with are
1. You can pay 15% every year
AND
2. You can double payment (biweekly $100 becomes biweekly $200)

[gizmo8]

the best thing if your able is go a weekly payment with a 20/20 plan for the year..its amazing amount of money you can save by just adding a few extra dollars to your weekly payments.

[Justin C]

My mortgage from ScotiaBank lets me pay up to 15% each year plus increase the payment by 15% each year. They typically are both included, not one or the other, so you might want to double-check your information.

[major]

We have our mortgage (3 yr, fixed) with BMO which offers a 20/20 payment option. Please note that the 20/20 is AND/OR not just OR.

In other words you can choose to:

A. Increase your weekly/bi-weekly/monthly payment by 20% (the increase will be applied on every subsequent payment over the remaining term of your mortgage)

AND/OR

B. Pay a 20% lump sum (aka Balloon Payment) against your mortgage - Can do this once per calendar year.

Of course, the 20% is a maximum. Any amount(s) less than 20% of the original mortgage value is also OK.

For us, we found that a 20% lump sum payment at the beginning of the year had a larger impact on reducing the total interest on the mortgage. This year we applied both a 20% lump sum AND increased our monthly payments by 20%.

[grant]

Option A: Increase the weekly payment by 20% (i am paying weekly)

Option B. Prepay the 20% of the Mortgage Amount Taken: Every Year For the Term (Term 3 years)
If you can consistently pay > 20% extra on your mortgage, then you got a mortgage with too long an amortization.

Next time you're up for renewal, tell the bank how much you want to pay every month/year and they will shorten the amortization to match that. Then you won't worry about running out of excess contribution room.

[mystical2003]

If you can consistently pay > 20% extra on your mortgage, then you got a mortgage with too long an amortization.

Next time you're up for renewal, tell the bank how much you want to pay every month/year and they will shorten the amortization to match that. Then you won't worry about running out of excess contribution room.

Yes, but then you also have a huge payment to deal with if something happens. The best way to do it is have the longest amortization and get your bank to allow you to do multiple payments for the 20% per year, and then do these just before each 6 month point since interest is only calculated semi-annualy.

[Justin C]

Yes, but then you also have a huge payment to deal with if something happens. The best way to do it is have the longest amortization and get your bank to allow you to do multiple payments for the 20% per year, and then do these just before each 6 month point since interest is only calculated semi-annualy.

Is this actually true for ANY bank? Sure, interest is COMPOUNDED semi-annually, but they just use that to slightly reduce your monthly or weekly rate. Interest has always been calculated with each regular payment for my mortgages. I can login after each payment and see that the balance has been reduced by (payment - interest).

[grant]

Yes, but then you also have a huge payment to deal with if something happens. The best way to do it is have the longest amortization and get your bank to allow you to do multiple payments for the 20% per year, and then do these just before each 6 month point since interest is only calculated semi-annualy.
if "something happens" there is nothing stopping you from increasing the amortization schedule at that time.

"the best way" ... is debatable. If the OP is repaying 20% extra and wishing he would repay 21+%, i wouldn't consider that the best.

[grant]

Is this actually true for ANY bank?
For my TD mortgages I just received a statement that showed progressively smaller interest payments every month. So that particular data-point indicates "no, not true"

[cannon_fodder]

For my TD mortgages I just received a statement that showed progressively smaller interest payments every month. So that particular data-point indicates "no, not true"

Are you saying that you recently made a lump sum prepayment and it appeared to have no effect on your interest payments? One would expect progressively smaller interest payments with a regular payment schedule but a significant drop off should you make a substantial prepayment.

I'm going into BMO today and ask for info about this very issue. I do know that, with my 5 year fixed mortgage, if I were to dip into the prepayment "fund" that has built up, they would then charge me the posted rate on the money I took out which, for banks like BMO, is a good 1% higher than what they typically give you (and almost 1.5% higher than my current rate).

[sunnybono]

Hi

I will be starting mortgage for my new home in coming month of april.
During the life of the mortgage i have two options.

Option A: Increase the weekly payment by 20% (i am paying weekly)

Option B. Prepay the 20% of the Mortgage Amount Taken: Every Year For the Term (Term 3 years)

I presume i may have additional finances and want to put the money in mortgage which option will will be more beneficial to me.

Option A or Option B or It does not matter

Will Look forward for your feedback on this account

titleeboy

Personally I don't like the 1st option. Coming up with 20% extra weekly is a lot more easier than the 20% lump sum per year. Most banks will give you 15% prepayment privaleges per calender year, but then on the other hand they will let you increase your payment up to 100%!!!

sk

[CompWizrd]

If you can consistently pay > 20% extra on your mortgage, then you got a mortgage with too long an amortization.

Next time you're up for renewal, tell the bank how much you want to pay every month/year and they will shorten the amortization to match that. Then you won't worry about running out of excess contribution room.

Well, not always.. My mortgage company wouldn't let me go with a 5 year amort, saying 12 was the lowest they could go and still fit in the % of income rule

It'll be paid off next year, which is 4 years into the first term, thanks to paying down 20% a year.. i could have knocked even more off by putting down 25% more a year on payments, but elected not to, just in case.

[grant]

Well, not always.. My mortgage company wouldn't let me go with a 5 year amort, saying 12 was the lowest they could go and still fit in the % of income rule
You've got me there! congrats on paying mortgage so fast.

[JWL]

Overall, if you have a number of year's payments left, the lump sum options offer the most flexibility and can have the biggest impact. But the reverse could be true in the late years of your mortgage.

In simple terms, figure out what number is bigger: 20% of your balance or 20% of your payment x number of payments remaining.

the best thing if your able is go a weekly payment with a 20/20 plan for the year..its amazing amount of money you can save by just adding a few extra dollars to your weekly payments.

Note that most of the benefit is because you are paying more, rather than more frequently. To get your weekly payment amount they take your monthly payment divide it by 4 so when you make 52 weekly payments your are doing the equivalent of 13 monthly payments. The impact of the extra monthly payment is much bigger than having less interest from paying more frequently.

[mystical2003]

[QUOTE=grant;4880960]if "something happens" there is nothing stopping you from increasing the amortization schedule at that time.
QUOTE]

Why go through the cost of redoing your mortgage when that something happening obviously means you have been hurt financially. To spend more makes no sense. To just leave it with a long amortization with flexible repayment options would work out better.

I agree that which is better is debatable and would depend on the individual situations but I would always take the longer amortization with flexible repayments.

Getting a 20% repayment option is easy, making any mortgage payable in 5 years. Not to mention that at renewal any amount an be paid off.

[FattyFace]

Getting a 20% repayment option is easy, making any mortgage payable in 5 years. Not to mention that at renewal any amount an be paid off.

Are you sure it works this way? I thought it was more like this:
Example: $100k principle
Prepay 20% first year, then you have a balance of $80k, prepay 20% second year, then you have a balance of $80k * 0.8 = $64k. Prepay 20% third year, then you have a balance of $64k * 0.8 = $51.2k.

IE: You get to pay 20% of whatever the balance is, not 20% of whatever the principle was, so they still get to ding you until you can refinance or some such.

[mystical2003]

Are you sure it works this way? I thought it was more like this:
Example: $100k principle
Prepay 20% first year, then you have a balance of $80k, prepay 20% second year, then you have a balance of $80k * 0.8 = $64k. Prepay 20% third year, then you have a balance of $64k * 0.8 = $51.2k.

IE: You get to pay 20% of whatever the balance is, not 20% of whatever the principle was, so they still get to ding you until you can refinance or some such.

With BMO it is 20% of the original Mortgage Principle.

http://www4.bmo.com/personal/0,2273,35649_36751,00.html

[glacier76]

By increasing your payments to whatever percentage, you're usually stuck with that increased amount for at least that mortgage year, right? The lump sum gives you a lot more flexibility. But just increasing your payments is easy because you don't need to think about it. If it were me, I'd use up my 20% lump sum. If that isn't enough, then increase your regular mortgage payments.