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How Mortgage Acceleration Works
At FREEandCLEAR, our goal is to help you own your home free and clear in as little time as possible. One of the best ways to pay off your mortgage faster is to accelerate your mortgage by over-paying your monthly mortgage payment. Simply put, overpaying your monthly mortgage payment means paying more than the required amount. For example, if your scheduled monthly mortgage payment is $1,800, you pay an extra $200 per month and make a monthly payment of $2,000.
Over-paying your mortgage moves up, or accelerates, the date when your mortgage is paid in full. Accelerating your mortgage can shorten the term of your mortgage by a number of years and save you tens of thousands or hundreds of thousands of dollars in mortgage payments. The sooner your mortgage is paid in full, the sooner you can start making mortgage payments to yourself instead of a lender.
The reason loan acceleration can have such a significant impact in reducing your total mortgage payments is because of the way mortgage amortization works. Amortization is the calculation method used to determine your monthly mortgage payment and specifically, the split between the principal and interest components that make-up the mortgage payment. According to the mechanics of amortization, your monthly mortgage payment and amount of monthly interest due is calculated based on your current loan balance, so if you reduce the loan balance, the split between principal and interest changes.
You can apply mortgage acceleration at any point over the course of your loan. Even if you are ten years or more into your mortgage, you can start accelerating your mortgage and save thousands of dollars in interest expense.
When you over-pay your monthly mortgage payment, the dollar amount of your remaining monthly mortgage payments does not change, but the breakdown between the principal and interest components that make-up your monthly mortgage payment does change. By over-paying your mortgage, you reduce your mortgage balance. A lower mortgage balance results in a lower required interest payment.
So although your monthly mortgage payment does not change, the interest component of your mortgage payment goes down while the principal component of your mortgage payment increases. You are paying down your mortgage balance faster, or accelerating your mortgage, which reduces the total number of payments and your interest expense.
Please note that you do not need to pay a company to implement mortgage acceleration. You can accelerate your loan on your own without paying a service. Most mortgage acceleration companies offer little value to borrowers and several have engaged in fraudulent practices in the past.
The example below illustrates the significant financial benefits of mortgage acceleration. In this example we use a $380,000, 30 year fixed rate mortgage with a 4.0% interest rate and the borrower applies mortgage acceleration and overpays his or her mortgage by $200 every month, reducing the principal balance of his or her mortgage faster. Using mortgage acceleration enables the borrower to reduce his or her mortgage term by more than five years, make 63 fewer monthly mortgage payments and save almost $55,000 in interest expense.
- OurMORTGAGE ACCELERATION CALCULATORdetermines the savings from overpaying your mortgage
Using the same example as above, the chart below shows the monthly mortgage payments for an accelerated fixed rate mortgage (red line on chart) as compared to the original mortgage with no overpayment (blue line on chart), over the life of both mortgages. The graph shows the difference in monthly mortgage payments and how mortgage acceleration results in the borrower making 63 fewer monthly payments to pay off the mortgage, which results in significant interest expense savings.
The timing and amount of mortgage acceleration is 100% up to the borrower. You can accelerate your mortgage by $700 one month, $1,200 the next month and then stop accelerating your mortgage and make your required payment the following month. You can apply mortgage acceleration at any time — for the entire term of your loan or you can start and stop years into your mortgage. For example, you can accelerate your mortgage starting with your first payment or you can start accelerating your mortgage with your 121st payment (10 years into the mortgage). You can stop overpaying your mortgage at any time — it is completely up to you.
To accelerate your loan simply add the overpayment amount to your monthly or bi-weekly mortgage payment and indicate to your lender that the extra amount goes to pay down your principal balance (either in the comments section of your check or by contacting your lender directly if you use auto pay).
Although the example above shows a $200 monthly overpayment, it is important to understand that the more you overpay your mortgage, the fewer mortgage payments you have to make and the more money you will save in reduced interest expense. The chart below looks at the impact of various monthly overpayment amounts on a $380,000 30 year fixed rate mortgage with a 4.0% interest rate. The chart illustrates that the greater the amount of the monthly overpayment, the greater the mortgage acceleration. The greater the mortgage acceleration, the shorter the term of the mortgage and the more money you save in interest expense.
Learn how mortgage acceleration works by watching our video tutorial
Sources
“CFPB Takes Action Against Mortgage Payment Company And Servicer For Deceptive Ads.” CFPB. Consumer Financial Protection Bureau, July 28 2015. Web.
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