# why does paying your mortgage off bi-weekly bring down your amortization so much?



## sunworship (Mar 15, 2019)

HI,

I was fooling around with the Scotiabank amortization calculator and I noticed that if I shifted to making bi-weekly payments, I shaved 4 year and 8 months off my mortgage length.


Could someone explain?

Thanks!


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## Just a Guy (Mar 27, 2012)

You make an extra full payment directly to the principle every year. At these interest rates that amounts to three months of interest in savings.


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## sunworship (Mar 15, 2019)

Thank you. I also saw that if I make annual lump sum payments the mortgage period significantly reduces even if that lump sum is only 2-3 payments directly to the principal. 

How does one decide what the right balance is between paying down the mortgage more aggressively and saving for retirement?


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## Just a Guy (Mar 27, 2012)

Well, I learned the best solution is to get the longest amortization possible on your mortgage, but adjust your payments to be as aggressive as possible. So, you May get a 30 year amortization, but make payments as if it’s a 20 year bi-weekly mortgage (paid off in 17.5 years). 

The benefit of the long amortization is, if you run into trouble, or just your plans change, you can adjust your payments back to the amortization limit and lower your payments without having to renegotiate or requalify for a new mortgage. 

You can always make more payments, but you can’t change the amortization without renegotiating.


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## Just a Guy (Mar 27, 2012)

As to how aggressively you get, that’s a personal decision. A mortgage is The cheapest money you’ll ever get. If you can make more money by investing, it’s probably a better choice to invest (if you don’t fear debt). 

If you fear debt, you may want to pay it off. 

I found out, the hard way, that living debt free isn’t as secure as most people think. I almost lost everything when I got injured and couldn’t work for several years even though I was debt free and had some savings. Now I have lots of debt, but way more assets and have a passive income that supports all my needs while constantly paying down the debts.


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## Plugging Along (Jan 3, 2011)

^Agree with JAG! The longer amortization is better for flebility. We had 25 or 30 years (can’t remember) but paid off in less than 8 years. It was very helpful when my spouse was laid off while I was on mag leave, and no severance. 

You will get many different views on paying off mortgage vs saving for retirement. I think in the early, days we made extra mortgage payments using the tax refunds we had for our rrsps. We were in hirer tax tax brackets, so did our rrsp first, used the refunds, and then when ever we had raisesor additonal money (such as when the cop and ei were no longer being deducted for year), they all went for extra payments.


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## OptsyEagle (Nov 29, 2009)

One of the biggest impediment for people thinking about putting extra payments on a mortgage, is this:

Let's say a person has a $300,000 mortgage, on a $400,000 house, that they have to pay for 25 years to get rid of. Let's say they come across a $20,000 win fall. The problem most people have is when they see that they could have a $300,000 mortgage and a ton of much deserved fun and stuff from $20,000 and compare that to NO fun at all and having a $280,000 mortgage, and no change to next months payment, people tend to lean towards spending the win fall. It just seems to make more sense. It feels right.

It takes quite a discipline to think that using the money for the mortgage makes more sense. The way I always did it, is I list my assets and liabilities on paper, and of course calculate a net asset value, which is assets minus liabilities.

So in my case I would have a $400,000 house plus $20,000 cash. I would minus a $300,000 mortgage and end up with $120,000 net asset value and a mortgage that will require 25 years to pay down.

If I spend the cash everything above gets worse. My net assets drops by $20,000. If I put it to the mortgage, nothing mathematically changes. I still have a $120,000 net asset value or what others call a net worth (always hated that term)...but, even though my net assets are the same, the number of future mortgage payments has decreased significantly and my debt load has decreased (a number I also keep close observation of as well).

So you can see, it is how you look at things. I am not saying my method will make you happier. If the spenders method of looking at it, makes more sense to you, then you are a spender, and I will leave you to what you should do. A saver looks at it more my way.


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## sunworship (Mar 15, 2019)

Okay say after the bi-weekly mortgage payments, utilities, transportation, taxes, food, bills, entertainment, clothing, gifts, travel, there's $2500.00 leftover each month for retirement/investing/principal mortgage payments - what are the various consideration to give (factoring personal preference) for how to split up that $2500 between retirement/investing/principal mortgage payments?


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## Just a Guy (Mar 27, 2012)

True, but you missed the third way. You invest the 20k and make a return that’s better than the interest rates. There are many ways to do this, with various amounts of risk and skills needed. But, for example, you could put 20% down on a rental property or two (I just closed on two one bedroom places for $100k total) which will generate $2000/month in rent (before expenses). Even if each only makes a couple hundred dollars a month to begin with, you’ll still get a pretty healthy return to further invest (until you are financially free) or to play with on someone else’s dime. 

I’ve also managed pretty consistent double digit returns on my stocks, but those opportunities aren’t as common as in real estate (not that they’re common there either, but there are exceptions whereas I need to wait for a crash in the stock market to get in).


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## Just a Guy (Mar 27, 2012)

sunworship said:


> Okay say after the bi-weekly mortgage payments, utilities, transportation, taxes, food, bills, entertainment, clothing, gifts, travel, there's $2500.00 leftover each month for retirement/investing/principal mortgage payments - what are the various consideration to give (factoring personal preference) for how to split up that $2500 between retirement/investing/principal mortgage payments?


There is no “right” answer anyone here can give you as it all depends on you, your abilities and your risk tolerance. For me, it was an emphasis on developing passive income, but I’m in the minority, even on this board. Many more would say pay off your mortgage (which would be my last choice), and some will say do both.


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## like_to_retire (Oct 9, 2016)

sunworship said:


> How does one decide what the right balance is between paying down the mortgage more aggressively and saving for retirement?


There's really no balance, you simply move your money into the best investment.

The answer lies in your ability to make more on your savings for retirement that you would paying off the mortgage. It's just math. 

Generally, paying off the mortgage is the hands down winner unless you're some darn good investor.

Where else will you get a guaranteed, no-risk, tax free return, equal to what you're paying on your mortgage? It can't really be done.

I don't know, I have a hard time finding ~ 4.5% tax free guaranteed investments. The best I can do is GIC's at around 3.0-3.5% taxable that result in considerably less after tax.

Say your mortgage rate is 3.5%, and your MTR is 25%.

The "break-even rate" for calculating whether you should pay down your mortgage or invest (in an open account) is about 4.6%. 

That is, you'd need to earn 4.6% (in an open taxable account) in order to beat the rate you'd implicitly earn by paying down your mortgage. 

THE MATH: 3.5/(1-0.25) = 4.6%

ltr


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## fireseeker (Jul 24, 2017)

LTR has nailed it.
It's the guaranteed after-tax return that is important for comparing investing options.
JAG invests more aggressively, which can certainly pay off, but those returns aren't guaranteed.


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## peterk (May 16, 2010)

What's your asset allocation JAG? You said you mostly only buy stocks when on sale... Have you just been paying off those rental mortgages for the past 5+ years and not investing much?

Do you plan to leverage your many real estate holdings to the hilt if there is another major market correction and banks are yielding 8%+ again?


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## Just a Guy (Mar 27, 2012)

I don’t look at asset allocation. I buy companies I know and use when they hit a crisis. So I recently bought kraft/Heinz. I bought bmo in 2007, bought some income trusts when the government announced changes. That kind of thing. Truth is I don’t really pay attention to it. I’ve got more than those, but they come to mind right now. I’m a buy and hold value investor. 

As for real estate, I buy really low, and am getting really good rents, paying down aggressively since I have a lot. I also am able to finance the new ones at 100% so it doesn’t cost me anything to buy them. I buy with a correction and high interest rates already factored in to the purchase. I’ve also been doing it for more than 5 years and have a lot. Bought 7 in the last year alone.


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## peterk (May 16, 2010)

I know you've been doing it for more than 5 years! I just meant that since stocks have been very high for the past 5 years, have you not been buying them very much...?

So you pay down the mortgages on your rentals aggressively, and buy stocks intermittently when the mood strikes. Do you keep a ton of cash then? Or pay off the mortgages aggressively and then re-leverage to buy stocks when the mood strikes?

Surely you look at asset allocation...


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## Just a Guy (Mar 27, 2012)

Nope, I’m an opportunist couldn’t care less for allocation, I want cash flow. My real estate is always 100% financed, so I don’t need a lot of cash. I buy it on a heloc, refinance it, pay off the heloc, rinse and repeat. As for the stocks, I make enough now from the businesses, stocks and real estate that I can always find something to throw at a deal, but it has to be a good deal. Most of my holdings in stocks I want my money back out in under 10 years from some form of passive income (say dividends) then my holdings are all just profit, so I don’t worry about the fluctuations.


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## Rusty O'Toole (Feb 1, 2012)

Are you even allowed to make extra payments on a mortgage? A friend of mine used to toss in a few extra bucks on his mortgage payment, like $11 one month, $30 the next, whatever he could afford. His 5 year term was up after about 3 years because the computer calculated the amount he still owed to be equal to what he should have owed at the 5 year mark. But, I don't believe they have allowed that kind of thing for years. The last mortgage I had, would only allow extra payments once a year with a maximum of $10,000. I took advantage of this but still had to wait out the full 5 years. Otherwise I would have had to pay a penalty.


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## Plugging Along (Jan 3, 2011)

Rusty O'Toole said:


> Are you even allowed to make extra payments on a mortgage? A friend of mine used to toss in a few extra bucks on his mortgage payment, like $11 one month, $30 the next, whatever he could afford. His 5 year term was up after about 3 years because the computer calculated the amount he still owed to be equal to what he should have owed at the 5 year mark. But, I don't believe they have allowed that kind of thing for years. The last mortgage I had, would only allow extra payments once a year with a maximum of $10,000. I took advantage of this but still had to wait out the full 5 years. Otherwise I would have had to pay a penalty.


I think it depends on your mortgage. Every mortgage that I have had allows for you double the payments and do an once a Year lump sum up to 20% of the original principle. I think we did have one team before that only allowed 10% a year


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## l1quidfinance (Mar 17, 2017)

I can double up ( with TD) or up to a fixed lump sum os some limit that I couldnt possibly afford unless living on Kraft Dinner and giving up everything else. I typically put down a few hundred extra every pay. 
I'm trying to get the feel good factor of bringing down the total amortization period whilst still striking a blance to save and invest.


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## Longtimeago (Aug 8, 2018)

sunworship said:


> Thank you. I also saw that if I make annual lump sum payments the mortgage period significantly reduces even if that lump sum is only 2-3 payments directly to the principal.
> 
> How does one decide what the right balance is between paying down the mortgage more aggressively and saving for retirement?


How does one see there as being a difference between paying down the mortgage and saving for retirement? Paying down a mortgage is part of saving for retirement. 

The only real question is as Just a Guy is indicating, which will pay you more return on your money. If you cannot earn more from investing the $20K being used as an example, than you can save from paying the mortgage down faster, then you pay the mortgage and vice versa.

From my perspective you seem to somehow see the two as separate things whereas OptsyEagle has clearly demonstrated to you that they are not. It is what OptsyEagle refers to as your Net Asset Value that matters. The decision of what to do with available funds should be to do what will result in the highest increase in your Net Asset Value.


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## Pluto (Sep 12, 2013)

Interest on a mortgage is front loaded. In the beginning the portion of each payment that is interest is highest, and at the end of the mortgage the portion of each payment that is interest is low. So if you can make extra payments on the principle during the first 5 years of the amatorization, that is most effective in lowering your overall interest paid. In the later half of the amatorization, it may not make sense to make extra payments as the portion that is interest gets lower and lower.


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## Just a Guy (Mar 27, 2012)

The problem with paying down your mortgage is the money is rather difficult to access. In some cases that can be a good thing as it’s harder to spend. However, if you need to access your assets, they are all locked up. You can get a heloc, but it’s not the same as free cash flow of liquid assets like stocks. Also, if you were forced to sell your house because you needed the money, you still need a place to live, so most of that money would still be needed to downsize or rent. 

Being mortgage free still has issues many people miss.


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## Plugging Along (Jan 3, 2011)

I agree that there is little difference between paying a mortgage vs saving for retirement. Assuming that once you pay off your mortgage, you don't do any thing silly like spending all of the new money, instead that money goes into your investments or retirement. 

I do believe there is 'balance' or question about how much money do you have in your savings or something more liquid than your mortgage. I found this question to be a little less pure number crunching when you are first starting out. One strategy, you can put every spare penny you have onto your mortgage, leaving you with little or no cash savings, or emergency fund. If it something happens, then even though your mortgage is smaller, its' not easily accessible. Another strategy, would be to have enough cash or liquid investments to be able to access in emergencies, even if the rate of return is lower than the mortgage. I found this question of finding out how much should be in the that emergency/cash fund to be a more complex question than the mortgage or retirement fund.


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## OptsyEagle (Nov 29, 2009)

All I know is you will be amazed at how little money you need when you are debt free. For most Canadians, every dollar they pay towards their debts, they need to earn $1.25 to almost $2 of income so that by the time they pay their taxes, they have enough left to make their debt payments.

Add to that, the fact that you earned that $1.25 to $2 of extra income, that you never got to keep, our government believes that your gross income is so high, that you must be wealthy and therefore, they increase the tax on all your other work income, your RRSP withdrawals, your pension income and investment income, accordingly. They take back your GST credits, your GIS benefits, your age credits, your Ontario Trillium benefits and also in Ontario they think you should pay 100% of your electricity bill.  All because you are overburdened with debt. There is a slew of income tested benefits that these debt obligations can effect.

Not sure I would call that wealthy, but our government does, so I suggest you do the opposite. Pay off your debts, build your wealth, and by doing so lower your tax bracket and enjoy your GIS, GST credits, subsidized electricity bills, and additional after tax income, if you can.

It's all messed up, I know, but it is what it is.

(Yes. My analogy applies mostly to non-tax deductible debt, which is the majority type of debt Canadian households have.)


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## Just a Guy (Mar 27, 2012)

Having had to live that lifestyle, albeit with a young family, I can testify that it isn’t as easy, or as cheap, as you may think. Especially when there is no end of the situation in sight. 

Another thing to consider is a house is a fixed priced asset for the most part. As you start to draw down its equity, there is nothing to replace it. The alternative if a passive income which continues each month. 

Again there is no “right” answer, and not everyone is going to run into a crisis where they could lose everything, but don’t get complacent on any one solution...they all have drawbacks, even if you don’t see them.


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## My Own Advisor (Sep 24, 2012)

Just a Guy said:


> There is no “right” answer anyone here can give you as it all depends on you, your abilities and your risk tolerance. For me, it was an emphasis on developing passive income, but I’m in the minority, even on this board. Many more would say pay off your mortgage (which would be my last choice), and some will say do both.


I'm a "do both" guy since I believe in building investable assets while killing debt at the same time. Win-win. Also a good hedge against a potential job loss - without any investable assets - nothing to fall back on.


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## Eclectic12 (Oct 20, 2010)

Just a Guy said:


> The problem with paying down your mortgage is the money is rather difficult to access ... You can get a heloc, but it’s not the same as free cash flow of liquid assets like stocks ...


Because of various factors such as having little equity, not setting it up in advance or the cap on the allowed amount ... sure.

For what was allowed, in early 2009 all I did was write a cheque to access the equity portion to pay for the stocks I bought.


Cheers


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## Just a Guy (Mar 27, 2012)

Funny thing is, despite growing my own wealth and being financially free, having gone through what I did, I still don’t feel completely “safe” by any means. I can still see scenarios where I could get into trouble. 

It’s like the people who survived living through the Great Depression, that kind of thing affects you and sticks with you throughout life. It doesn’t keep me up at nights anymore, but I’m certainly still frugal when I probably don’t have to be anymore.


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## Mookie (Feb 29, 2012)

Just a Guy said:


> I just closed on two one bedroom places for $100k total) which will generate $2000/month in rent (before expenses).


JAG, just curious what part of the country you can buy a place for $50k, and then rent it for $1000/month. I just did an MLS search of the entire Vancouver Lower Mainland region, stretching all the way out the valley to Hope for properties up to $50,000. Only one hit - a parking space for $49k.


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## Just a Guy (Mar 27, 2012)

Canada is a big place, try the central provinces or the eastern ones. Also, there is a big difference between listing prices and selling prices.


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## Retiredguy (Jul 24, 2013)

Pluto said:


> Interest on a mortgage is front loaded. In the beginning the portion of each payment that is interest is highest, and at the end of the mortgage the portion of each payment that is interest is low. So if you can make extra payments on the principle during the first 5 years of the amatorization, that is most effective in lowering your overall interest paid. In the later half of the amatorization, it may not make sense to make extra payments as the portion that is interest gets lower and lower.


Mortgage interest is not front loaded. If it was you'd be signing up to pay the total amount of interest and principal for the given amortization length. Interest in Canada is calculated semi-annually NOT in advance. Yes more goes to interest in the early years of paying a mortgage but that is because you owe more money. One dollar of principal outstanding in month one of a mortgage incurs that same interest as a dollar outstanding in month 300 of a 25 year mortgage ( assuming the interest rate stays the same throughout the amortization period) and following this I don't agree with your statement that it may not make sense to make extra payments as your outstanding principal gets smaller.


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## crooked beat (Jan 19, 2011)

Retiredguy said:


> Mortgage interest is not front loaded. If it was you'd be signing up to pay the total amount of interest and principal for the given amortization length. Interest in Canada is calculated semi-annually NOT in advance. Yes more goes to interest in the early years of paying a mortgage but that is because you owe more money. One dollar of principal outstanding in month one of a mortgage incurs that same interest as a dollar outstanding in month 300 of a 25 year mortgage ( assuming the interest rate stays the same throughout the amortization period) and following this I don't agree with your statement that it may not make sense to make extra payments as your outstanding principal gets smaller.


I still don't understand why in the early years of a mortgage, that the percentage of each payment is much higher in percentage to interest than to principal. Somewhere around year 12 -13 of a 25 year mortgage do the percentage become 50% 50% and then in year 13 - 14, the principal percentages move past 50% and the interest falls below 50%.


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## Just a Guy (Mar 27, 2012)

It’s because all the interest has to be paid off In The initial term of the mortgage. So, using simple interest, let’s say you borrow 100k at 5%. You need to pay 5k plus some principle in the first year. 

Let’s now go to the halfway point, which is actually longer than halfway because you had to pay the interest. 

Mortgage is now 50k and you interest for the year is now $2500. If the payments are the same, you now have $2500 more being paid off the principle. 

When you negotiate a 5 year term, you need to pay off all the interest in that term and there is more at the beginning because the loan is bigger. 

Understand?


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## fireseeker (Jul 24, 2017)

Looking at an amortization table may help.
Here, you can see the payment stays the same. But the ratio of interest paid to principal repaid changes every time.


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## Retiredguy (Jul 24, 2013)

crooked beat said:


> I still don't understand why in the early years of a mortgage, that the percentage of each payment is much higher in percentage to interest than to principal. Somewhere around year 12 -13 of a 25 year mortgage do the percentage become 50% 50% and then in year 13 - 14, the principal percentages move past 50% and the interest falls below 50%.



As others have explained below its because you owe more in the early years and interest is calculated and paid each month on the declining balance.

Also the tipping point when you pay more to principal than interest very much depends on the interest rate. Many here can remember higher interest rates. With a 11.5% rate and 25 yr amortization it is not until year 19 that you would be paying more to principal than interest. Whereas with a 2.7% rate, with your very first payment you would be paying more to principal than interest.

Here's another link to a amortization calculator.
http://www.canadamortgage.com/webcalcs/realtorlink/amortschedule.cgi


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## OptsyEagle (Nov 29, 2009)

crooked beat said:


> I still don't understand why in the early years of a mortgage, that the percentage of each payment is much higher in percentage to interest than to principal. Somewhere around year 12 -13 of a 25 year mortgage do the percentage become 50% 50% and then in year 13 - 14, the principal percentages move past 50% and the interest falls below 50%.


The other way to understand it is: You are not allowed to carry interest owed past any payment period. So every monthly payment *pays 100% of all interest owed*. If the payment is bigger then that, the rest goes against principle. As others have said, because the principle is higher in the early years, since it has not been paid down as much, then the interest is higher as well. Since the payment is fixed and all the interest has to be paid in full, it is the amount that goes to principle that is lessened in the early years.

I hope that makes sense. I think about 4 of us explained it 4 different ways and you actually knew it was happening before you even asked the question, so I think we can call that "beating it to death". lol.


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## Pluto (Sep 12, 2013)

Retiredguy said:


> Mortgage interest is not front loaded. If it was you'd be signing up to pay the total amount of interest and principal for the given amortization length. Interest in Canada is calculated semi-annually NOT in advance. Yes more goes to interest in the early years of paying a mortgage but that is because you owe more money. One dollar of principal outstanding in month one of a mortgage incurs that same interest as a dollar outstanding in month 300 of a 25 year mortgage ( assuming the interest rate stays the same throughout the amortization period) and following this I don't agree with your statement that it may not make sense to make extra payments as your outstanding principal gets smaller.


I think you misunderstand this. 
If you look at the portion of each payment that is interest you will find the interest component higher at the beginning compared to the end. That means that making extra payments on the principle is more effective at the beginning compared to the end. 

For example, if one makes extra payments on the principle during the first 60 payments, you save more money than if you made extra payments during the last 60 payments. 

If you think the interest component - the dollar amont of interest - is the same for each payment on, for example, a 300 payment amatorization, you are simply wrong.


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## Pluto (Sep 12, 2013)

^ 
to prove the point calculate the following amatorization by clicking on the button here:
https://www.amortization-calc.com

Interest amount in payment 1 is $1313
Interest on last two payments is $7 and $43 respectivly.


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## Retiredguy (Jul 24, 2013)

Pluto said:


> ^
> to prove the point calsulate the following amatorization by clicking on the button here:
> https://www.amortization-calc.com
> 
> ...


I understood perfectly what you were saying. I'm not wrong. You missed my point. 

$1 prepaid in the first month saves x in one month (plus the additional 299 months of x interest, I agree) but $ 1 prepaid in the last month still saves the same x in one month. That was my point.

Assuming a constant interest rate throughout the amortization period the interest on $1 outstanding remains constant throughout the life of the mortgage. Doing the actual calculation, daily interest factors are used and depending on the number of days in a month 28, 30, 31 the interest amount result will be such that in February - 28 days you'll pay less of your monthly payment in interest and more to principal than you will in the following March with 31 days.


Here's an article that supports my ascertain that mortgages are not front end loaded.

https://www.mtgprofessor.com/A - Amortization/Is the Mortgage Front End Loaded.html


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## Pluto (Sep 12, 2013)

Retiredguy said:


> I understood perfectly what you were saying. I'm not wrong. You missed my point.
> 
> $1 prepaid in the first month saves x in one month (plus the additional 299 months of x interest, I agree) but $ 1 prepaid in the last month still saves the same x in one month. That was my point.
> 
> ...


You are hung up on the phrase "front loaded." it wasn't intended to mean what you think it means and I have no desire to defend your misunderstanding. 

The reality is, more interest in dollar terms is paid at the beginning than at the end and a prepayment of principle at the beginning is more effective at saving money than a prepayment of principle near the end. You can pick any phrase you want for that phenomena but it doesn't change the facts.


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## Retiredguy (Jul 24, 2013)

Pluto said:


> You are hung up on the phrase "front loaded." it wasn't intended to mean what you think it means and I have no desire to defend your misunderstanding.
> 
> The reality is, more interest in dollar terms is paid at the beginning than at the end and a prepayment of principle at the beginning is more effective at saving money than a prepayment of principle near the end. You can pick any phrase you want for that phenomena but it doesn't change the facts.


We agree. "it doesn't change the facts" yours or mine.

Cheers.


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## Gruff403 (Jan 30, 2019)

OP The only major question you need to answer is how comfortable you are with debt. Hate debt, can't sleep, makes you ill, causes hair loss then kill it ASAP or don't take it on in the first place. Renting and saving can work as well. 
I am from the camp that doesn't mind holding debt and looks at debt as a tool to build assets. Don't businesses often use debt to grow? It's great to have a paid for house as long as you have cash flow to support yourself. Otherwise the house is simply a store house for value that sits there. We had our house nearly paid off when I had a temporary job loss. We tapped the HELOC to cover expenses until returning to work. Realized that was access to cheap money so decided to put the house asset to work - bought other property, stocks, ETF's and a bit of fun. We didn't go crazy and always arranged that the principal of each mortgage payment was more than interest payment. I'm semi retired now and carry MORE debt than I did 25 years ago. At this point it is cash flow that counts. I have more than enough and the kids will get a reasonable inheritance. Keep debt under control, don't overextend and also put some away to take advantage of the time value of money. A dollar saved today is worth more than a dollar saved in a year.
Do what works for you and your family.


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## ian (Jun 18, 2016)

The secret of compounding interest. 

If you understand the math, and the impact, you will arrange your financial affairs to pay off that mortgage as quickly as possible and absolutely avoid credit card and other forms of high interest consumer debt.

The trick is to receive interest, not pay it. It is why the banks are so profitable. And never finance an depreciating asset!

We paid off more than one mortgage quickly simply by going to biweekly, increasing those payments slightly, and making an extra payment or two each and every year. It is fairly easy to move a mortgage amortization from 25 to 17 or eighteen years just by tweeking it a little. It can get a little more challenging to move it down to to 10 or 12. 

Once you have got it down to 17 and realize that you have just avoided 7 or 8 years of mortgage payments there is incentive to keep going. That is how we first started.


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## Just a Guy (Mar 27, 2012)

Actually the banks make money off of leverage, the same as real estate investor. For every dollar you deposit and they give you what 2% to keep you happy, they lend out 10-20 times that amount and charge around 4% just on mortgages. So the bank make 40-100% ROI on your money that they pay you 2% on.


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## Longtimeago (Aug 8, 2018)

Just a Guy said:


> Actually the banks make money off of leverage, the same as real estate investor. For every dollar you deposit and they give you what 2% to keep you happy, they lend out 10-20 times that amount and charge around 4% just on mortgages. So the bank make 40-100% ROI on your money that they pay you 2% on.


Leverage, compound interest (ian mentions), interesting terms worth understanding. Basic building blocks of finance. I always remember another simple basic that I learned when I was 16. I was working Friday evenings and all day Saturdays in a menswear store. The owner was a very interesting person in many ways. He told me that you should always owe the bank more money than they could afford to lose on you. That way, they would never refuse you a loan. 

Back in those days of course an individual bank branch manager made decisions on whether to grant a loan or not and obviously their performance was measured on how many loans were good vs. delinquent. So the branch manager couldn't afford to have you not repaying a loan even if it meant giving you another loan to pay the first loan with. LOL

What I was being taught (and of course didn't realize at 16) was that it is always best to be working with someone else's money, not your own. That's in effect what we all do when we take a loan for investment purposes. Of course taking a loan to pay for a car is not an investment decision and as ian says, never take a loan to pay for a depreciating asset is absolutely correct.

So if you combine working with someone else's money (the banks and their investors) with leveraging the money you get from them (say a down payment on an income producing property), that's a smart move. Then if you can do it in such a way that you can't be allowed to fail, the government will bail you out if all goes to hell in a handbasket. LOL I'm thinking of the government bailouts of companies in recent decades.

GM etc. must have been listening to advice from my old menswear store boss, Sam.


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## can_84 (Jul 2, 2011)

why does paying your mortgage off bi-weekly bring down your amortization so much?

That was your question and this is the most accurate answer you will get. It is lower because of the concept called "TIME VALUE OF MONEY" this is a finance theory where money today is worth more than money tomorrow. When your paying Bi-weekly your paying sooner than later so your interest calculated monthly is reduced hence the lower amortization period. 

You would need to be in accounting or finance to fully understand this but you can read up on sites like investopedia.com


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## Just a Guy (Mar 27, 2012)

The flip side of that argument is you pay off the house with future dollars that are worth less because of things like inflation.


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## twa2w (Mar 5, 2016)

Actually paying your mortgage biweekly or weekly does very little to shorten the amortization. Lets look at biweekly.
There are two ways to calculate biweekly. Referred to as biweekly 24 and biweekly 26..
You can take your monthly payment, multiply by 12 to get your annual payment and then divide by the 26 biweekly periods in a year. Biweekly 26
Or
You can simply divide your monthly payment by two. Biweekly 24
But you pay this payment 26 times a year. In effect paying an extra payment a year.


Biweekly 26 saves you about 3 months over 25 year amort.
Biweekly 24 saves you 3-6 years or so depending on the interest rate.

Effectively on the biweekly 24, you are paying one extra monthly payment which is what really what makes the difference. You could achieve almost the same savings in amortization by either paying one extra monthly payment a year as a lump sum, or by simply increasing your monthly payments by 1/12 th.

Some banks offer you a choice which way it is calculated, some do it one way or the other and don't tell you which way they do it. Yes one of the big 5 routinely does it as biwkly 26. Most people don't notice as few stay in the house 25 years.

It can also get reset at the term maturity, especially when rates have changed, and people don't realize it, which can effect your amort.


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## jsun (Feb 13, 2014)

After reading this thread, I am wondering how some of you are paying more than what the mtg/heloc payment is every payment?
Even if its through a HELOC and you fix the rate, the payments are set in stone - which bank allows you to pay more than whats required during your term?


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## Just a Guy (Mar 27, 2012)

Most helocs aren’t locked in, it’s an open loan, so you can paydown any amount you want at any time. Some helocs allow you to lock in portions like a mortgage, they may have restrictions on the amounts you can pay down and when, but generally have some form you can do. Same with most mortgages, you can usually increase your payments, pay down a lump sum, depending on the terms. Most mortgages allow you to pay down 10-20% depending on the contract. 

This is why it’s important to read all the terms of your mortgage and not just look at the rates.


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## twa2w (Mar 5, 2016)

To expend on JAG answer. Most banks offer some sort of prepymt privileges.
There are the accelerated weekly or biweekly options talked about upthread. Many have a 10/10 or15/15 or 20/20 program where once a year you can increase your payments going forward by up to 10 or 20% and or prepay your mortgage by 10 or 20%. Some banks also allow 'doubleups' where you can pay up to an extra payment each month, any month you want.
Read the fine print in your mortgage. Some of these options are based on calendar year and some are annual based on mortgage anniversay. Some of the 10 or 20 prepymt options are based on original balance, some are based on current value. Most allow you to do this only once a year but some allow you to pay smaller amounts throughout the year that total up to the 10 or 20%.
Some offer only some of these options, some allow all of them without penalty.


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## MrMatt (Dec 21, 2011)

can_84 said:


> why does paying your mortgage off bi-weekly bring down your amortization so much?
> 
> That was your question and this is the most accurate answer you will get. It is lower because of the concept called "TIME VALUE OF MONEY" this is a finance theory where money today is worth more than money tomorrow. When your paying Bi-weekly your paying sooner than later so your interest calculated monthly is reduced hence the lower amortization period.
> 
> You would need to be in accounting or finance to fully understand this but you can read up on sites like investopedia.com


It's because you're increasing your payments, 26 instead of 24. If you assume paying roughly the same amount of interest you've made 2 extra payments of principle. Early in the mortgage this could be as much as 2-4 months of principle. Look at your mortgage amortization and see how much of each payment goes to interest and principle, a single extra payment can skip you 2-3 payments ahead. AT high interest rates it pushes you ahead even faster.


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## Eclectic12 (Oct 20, 2010)

jsun said:


> After reading this thread, I am wondering how some of you are paying more than what the mtg/heloc payment is every payment?


Depends on the mortgage terms ... if the mortgage allows it then it is up to you the mortgage payer as to when/how to use it. Not asking about it may mean being directed to a mortgage that does not allow these choices.
https://www.ratehub.ca/mortgage-pre-payment

If you want specific banks, here are CIBC and RBC links that say their mortgages allow up to doubling one's mortgage payments.
https://www.cibc.com/en/personal-banking/mortgages/resource-centre/prepayment.html
https://www.rbcroyalbank.com/mortgages/mortgage-prepayment.html


Basically both my mortgages allowed doubling the payments plus paying up to a % each year (IIRC, the first was 10% of the total mortgage value originally contracted for each year and the second was 25%).

If I had a windfall, great stock investment, big bonus or salary increase - it would have sucked to not be able to pay down the mortgage by being locked into a set schedule with no added privileges. :rolleyes2:




jsun said:


> ... Even if its through a HELOC and you fix the rate, the payments are set in stone - which bank allows you to pay more than whats required during your term?


??? ... my HeLoc, where there is a balance on it, only specifies the *minimum* payment, not a fixed rate. This is similar to a CC statement giving the balance with a minimum payment. The big difference is the interest rate is much lower!

Where I chose to, I can pay off 100% of what was on the HeLoc while at other times, I can choose to make the minimum payment plus an extra amount to be constantly reducing the amount owing.


In a nutshell, if the mortgage and/or HeLoc locks one into set payments with no opportunity to make extra payments or charges a fee for making extra payments and in the case of the HeLoc, prevents paying off the total balance - one has signed up for a crappy mortgage/HeLoc that has extra restrictions that most mortgages/HeLocs do not have.


Like a CC, one has to be disciplined with how one uses a HeLoc. The mortgage will eventually be paid off, maybe not as cheaply as it could have been. The HeLoC debt, like a CC balance can live on almost indefinitely, if one pays the minimum amount only.

https://canadianmortgagesinc.ca/2018/10/heloc-vs-mortgage-everything-you-need-to-know.html


Prepayment privileges should IMO be actively sought and evaluated as part of considering a mortgage.
http://www.bestratefinancial.ca/tips-advice/10-things-to-consider-before-choosing-a-mortgage/
https://globalnews.ca/news/3801486/interest-rate-mortgage/


Cheers


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## crooked beat (Jan 19, 2011)

Thanks to all who have explained it. It all makes sense now!!!


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## jsun (Feb 13, 2014)

Eclectic12 said:


> ??? ... my HeLoc, where there is a balance on it, only specifies the *minimum* payment, not a fixed rate. This is similar to a CC statement giving the balance with a minimum payment. The big difference is the interest rate is much lower!
> 
> Where I chose to, I can pay off 100% of what was on the HeLoc while at other times, I can choose to make the minimum payment plus an extra amount to be constantly reducing the amount owing.
> 
> ...


This is if you keep it at the revolving rate based on prime as the HELOC comes. However you have the ability to fix the rate for a term lowering the interest rate and essentially turning it into a mortgage for x amount of years


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