Weekly and bi-monthly mortgage payments are becoming popular. Several home owners are taken up with this program as they feel, that if done correctly, several years can be taken off the mortgage amortization and thus their home could be free and clear years ahead of paying on a monthly basis.
Mortgage acceleration refers to the practice of paying off a mortgage loan faster than required by terms of the mortgage agreement. Mortgage acceleration is also called mortgage reduction, interest reduction or debt reduction. Interests on mortgage are always compounded. Early payments can reduce the period needed to pay the mortgage off.
Types of mortgage acceleration
The first type of mortgage acceleration is an offering from the mortgage company to set a bi-weekly plan without any huge fee to effect it. The standard monthly mortgage payments are maintained and a 1/12th monthly payment is added to the monthly payment in the extra principal box. For instance, if the mortgage is $1200, then you would end up paying $1300. This method helps you save thousands as interest. Here, by paying an extra principal instead, you do not have to pay an upfront fee to make the acceleration happen.
In another type of accelerated mortgage payment, the borrower uses the loan as a day to day transaction account. This loan is used to refinance the entire mortgage and in addition to the mortgage. Sometimes, it involves an offset account – which is separate to the mortgage but interests are offset on any deposit against the mortgage interest.
Advantages of accelerated mortgage payment
Accelerated mortgage payment programs claim that a particular type of loan can be paid earlier by cutting many years off the mortgage without additional payment. In other words, although additional payments are made, (when a monthly payment becomes bi-weekly), the savings increase significantly.
First of all, calculate how much interest you can save by paying an additional amount with mortgage payment. This additional amount will reduce the principal on your mortgage, the amount of interest and the number of payments.
In the most common method of accelerated mortgage payment which is a bi-weekly payment plan, in which half of the normal calendar monthly payment is made every two weeks, such that 12/13 of the yearly amount due is paid per annum.
Another plan is the practice of making ad hoc additional payments and the associated agreements preclude or penalize early payments.
Sometimes by making lump-sum payments toward the mortgage when permitted, you can ‘double up’ and make reductions on original mortgage amount. Thousands of dollars can be potentially saved and mortgage amortization is reduced.
Disadvantages of accelerated mortgage payment
While savings could be made by leaving funds that would otherwise be in a transaction or check account for bill – for instance, $ 4000 in your mortgage or related account could save about $280 per year on a 7% mortgage, But there are certain costs involved to set up such programs and this often exceeds the cost of your savings.
Accelerated mortgage payoff calculator
With the use of an accelerated mortgage payoff calculator, your savings, if you pay an additional amount along with your current mortgage payment, can be computed. Most often the accelerated mortgage calculators are available on the Bank web sites.
Accelerated mortgage payments are not for all
Not all accelerated mortgage payment programs are calculated using the rapid amortization process. It becomes therefore necessary to consult and confirm the payment processes with the mortgage company before jumping into a weekly or biweekly accelerated mortgage payment option.
While accelerated mortgage payment does help save thousands of dollars, it may not be right option for just everyone – it is important to look at all the options available and then arrive at a conclusion before signing up with any accelerated mortgage payment program.