I've stumbled upon some useful information that most people would not know, thought i should share it with you guys since it would become relevant soon.
Assume you take a $200,000 home loan, at an interest rate of 7% a year, for 10 years.
I'll be using simple calculation, i dont want to confuse those of you who hate math.
Assuming you fork out $2000 a month from your precious salary to repay your loan, thus every year, you repay $2000 x 12 = $24,000 of that loan.
Amount owed at the end of year..
Year 1: $200,000 x (1.07) - $24, 000 = $190, 000
Year 2: $190,000 x (1.07) - $24, 000 = $179, 300
Year 3: $179,300 x (1.07) - $24, 000 = $167, 851
Year 4: $167,851 x (1.07) - $24, 000 = $155, 600
We see that at the end of year 4, you still owe $155,600.
HOWEVER, IF YOU MADE BIWEEKLY PAYMENTS, that is 1 payment of $1000 every 2 weeks (Almost no different to paying $2000 a month), you will owe much less because you paid ABIT more, thus reducing your interest paid by a ton.
52 weeks in a year = 26 payments = $26, 000
Amount owed at the end of year..
Year 1: $200,000 x (1.07) - $26, 000 = $188, 000
Year 2: $188,000 x (1.07) - $26, 000 = $175, 160
Year 3: $175,160 x (1.07) - $26, 000 = $161, 421
Year 4: $161,421 x (1.07) - $26, 000 = $146, 720
We see that at the end of year 4, you still owe $146,720.
Thus by making payments every 2 weeks instead of every month, you pay an extra $8000 over 4 years, and owe $8879 less.
So you essentially saved $879 over 4 years for doing nothing.
So... you may be wondering, wtf is kelvin tan rambling about. wah kao $879 also want to type such a super long post to act smart.
Well, $200, 000 is a very small loan amount, and a 10 year loan is pretty short, alot of people take 10-40 year loans. Imagine if the interest rate was higher, the loan was higher, and the loan time was longer, you would end up saving at least a couple of thousand bucks.
Thought this might have been helpful
Assume you take a $200,000 home loan, at an interest rate of 7% a year, for 10 years.
I'll be using simple calculation, i dont want to confuse those of you who hate math.
Assuming you fork out $2000 a month from your precious salary to repay your loan, thus every year, you repay $2000 x 12 = $24,000 of that loan.
Amount owed at the end of year..
Year 1: $200,000 x (1.07) - $24, 000 = $190, 000
Year 2: $190,000 x (1.07) - $24, 000 = $179, 300
Year 3: $179,300 x (1.07) - $24, 000 = $167, 851
Year 4: $167,851 x (1.07) - $24, 000 = $155, 600
We see that at the end of year 4, you still owe $155,600.
HOWEVER, IF YOU MADE BIWEEKLY PAYMENTS, that is 1 payment of $1000 every 2 weeks (Almost no different to paying $2000 a month), you will owe much less because you paid ABIT more, thus reducing your interest paid by a ton.
52 weeks in a year = 26 payments = $26, 000
Amount owed at the end of year..
Year 1: $200,000 x (1.07) - $26, 000 = $188, 000
Year 2: $188,000 x (1.07) - $26, 000 = $175, 160
Year 3: $175,160 x (1.07) - $26, 000 = $161, 421
Year 4: $161,421 x (1.07) - $26, 000 = $146, 720
We see that at the end of year 4, you still owe $146,720.
Thus by making payments every 2 weeks instead of every month, you pay an extra $8000 over 4 years, and owe $8879 less.
So you essentially saved $879 over 4 years for doing nothing.
So... you may be wondering, wtf is kelvin tan rambling about. wah kao $879 also want to type such a super long post to act smart.
Well, $200, 000 is a very small loan amount, and a 10 year loan is pretty short, alot of people take 10-40 year loans. Imagine if the interest rate was higher, the loan was higher, and the loan time was longer, you would end up saving at least a couple of thousand bucks.
Thought this might have been helpful