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There are two approaches to mortgage acceleration:
At FREEandCLEAR, we are strong advocates of the monthly acceleration approach because it allows you to make fewer mortgage payments and save more money than the annual acceleration approach. By overpaying monthly you take advantage of the way amortization works. As you pay down the principal balance of your mortgage by a little extra every month, you benefit from the monthly recalculation of your mortgage payment and the change in the split between principal and interest.
A slightly lower interest component to your monthly mortgage payment (because you have reduced the principal amount of your mortgage) means a slightly higher principal component to your monthly mortgage â€“ so you pay down your loan faster. Remember, your required monthly mortgage payment â€“ the amount you are required to pay your lender â€“ does not change.
So if you overpay your mortgage by the same total amount in a given year, the monthly approach will accelerate your loan faster, reduce the term of you mortgage and save you more in interest expense, as compared to the annual approach. Also, it is important to remember that you can apply mortgage acceleration at an time over the course of your mortgage, even if you have been paying your mortgage for several years. The example below highlights the financial benefits of monthly acceleration as compared to annual acceleration.
The example below highlights the benefits of the monthly approach to mortgage acceleration as compared to the annual approach. The example uses a $380,000 30 year fixed rate mortgage with a 4.0% interest rate. The second column in the table show a borrower that applies annual mortgage acceleration while the third column in the table shows a borrower that applies monthly acceleration. The last column of the table shows the difference in savings between the two approaches. In both acceleration scenarios the borrowers overpay their mortgage by the same amount every year -- $1,814. With the annual acceleration scenario the borrower overpays his or her mortgage by making one extra payment of $1,814 at the end of every year. With the monthly acceleration scenario the borrower overpays his or her mortgage by $151 every month, or $1,814 in total for the year.
Using the monthly mortgage acceleration strategy enables the borrower to make one fewer monthly mortgage payment and save $1,459 in interest expense as compared to the annual acceleration approach. Although the savings between monthly and annual mortgage acceleration is not huge, every penny counts when it comes to your mortgage.
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How Mortgage Acceleration Works