Mortgage Acceleration

Mortgage acceleration is the practice of paying off your loan early in order to pay less in interest. Mortgage interest is levied on an annual basis based on how much you have outstanding on your loan. The standard 30 year fixed rate mortgage is amortized over 360 monthly payments. So, if you pay it down early, you can actually save a significant amount in interest payments. For example, let’s say you had a $300,000 mortgage at a 4.5 interest rate. Over 30 years, you’d pay a total of $547,220 if you went according to the amortization schedule. $247,220 - just under half of that amount - would go towards interest. On the other hand, if you paid it off in 25 years, you’d pay $500,249 total, only $200,259 of which would be interest. As you can see, you’re saving about $47,000.

Bi-Weekly Mortgage Payments

The most common type of Mortgage Acceleration plan is a bi-weekly mortgage payment. Typically, you pay once a month, which totals 12 payments a year. With a bi-weekly payment plan, you split your monthly mortgage payment in half and send a check to the bank every two weeks for a total of 26 payments a year. Those 26 half payments add up to 13 payments a year, or one extra monthly payment a year. In this way, you’d end up paying off your mortgage five years early and owe much less interest.

Other Mortgage Acceleration Methods

Alternately, you can choose to simply tack on an extra hundred or so dollars to your monthly payment, or make a commitment to a single extra payment per year. Or, you can choose to make one-time payments towards your principal whenever you have extra cash on hand. Either way, it’s important to make sure that your mortgage lender knows to apply the money towards your principal and that your lender does not charge you penalties for making early payments. Talk with your lender before closing the loan and read your contract for a clause about mortgage acceleration to make sure you won’t incur any penalties.

Mortgage Acceleration Services

You may have received offers in the mail that help you set up a biweekly payment plan or a mortgage acceleration plan. In general, you should avoid these. That’s because you can often set yourself up on a schedule on your own or work an arrangement out directly with your bank for free. Third party mortgage acceleration companies often charge a fee for their service. Worse yet, some simply hold on to your money for a certain period of time, rather than sending it to the bank, and use it to collect interest for themselves. With a spreadsheet, a mortgage calculator and some discipline, you can pull off mortgage acceleration on your own.