Accelerated Mortgage Payments

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Mortgages and, in particular, mortgage payments are all over the news these days. Now, you may be wondering, how can I pay my mortgage off sooner? Well, I created an exam prep question, which you see here to give us a framework to talk about the difference between weekly and accelerated weekly mortgage payments.

All right, here’s the question, assuming the monthly mortgage payment is $1,000, what would the accelerated weekly mortgage payment be, $227.29, $230.77, $240.74, or $250? There’s a difference in the way a weekly payment and an accelerated weekly payment are calculated.

Now, making regular weekly payments will save the borrower some interest because the lender’s receiving part of the payment sooner as compared to monthly payments. However, the accelerated method results in the mortgage being paid off much quicker with a much greater interest savings. Let’s explore why.

This is pretty easy to understand using the $1,000 monthly mortgage payment found in the question. First, we calculate the total annual payments if the borrower makes standard $1,000 monthly payments, then the total annual payments if the borrower makes weekly payments, and finally, the total annual payments if the borrower makes accelerated weekly payments.

If the monthly payment is $1,000, we multiply that by 12 months and arrive at total annual payments of $12,000. So to calculate the weekly payment, we just take that annual payment of $12,000 and divide it by 52 weekly payments to arrive at an answer of $230.77.

Now, you see that answer there? That’s not right. That’s the weekly payment amount. We’re looking for the accelerated weekly payment, which is calculated a little bit differently. To get that figure, we divide the monthly payment of $1,000 by four weeks and arrive at an accelerated weekly payment of $250. So let’s go ahead and choose that answer, and we’re correct.

Now, take note that when we multiply an accelerated weekly payment of $250 by 52 weeks in a year, we calculate total annual payments of $13,000. You see, the borrower’s making the equivalent of an extra monthly payment with the accelerated method, and that’s what results in the mortgage being paid off so much quicker. To many borrowers, paying $250 per week feels the same as paying $1,000 per month, but of course we know some months have an extra week.

So when you’re quoted a weekly mortgage payment, be sure to ask, “Is this a weekly payment, or an accelerated weekly payment?” Better yet, now you know how to check yourself.

The Efficient Frontier