Use our calculator to understand how to apply mortgage acceleration to an interest only mortgage to pay down your loan balance and reduce your required monthly payment. With an interest only loan you are required to pay only interest for first part of the mortgage which means accelerating your loan, or paying more than your required monthly payment, reduces your principal balance. The lower your mortgage balance, the lower your required loan payment. Our calculator shows you the reduction in interest expense and your loan balance at the end of the interest only period when you accelerate your loan.Watch our Interest Only Mortgage Acceleration Calculator "How To" video
To use the calculator input your loan amount, interest only period rate, the length of the interest only period, the mortgage start date, overpayment start date, type of overpayment and amount of overpayment.
The calculator enables you to choose how you accelerate the loan -- either by making a fixed monthly payment or a fixed overpayment amount. With a fixed monthly payment, you make the same payment every month. For example, you pay $1,100 every month if your initial required interest only payment is $1,000. This approach actually increases how much you overpay your mortgage because your required payment decrease a little every month as you accelerate your mortgage so your overpayment amount increases gradually over time.
With a fixed overpayment amount, you accelerate your interest only loan by the same amount each month. For example you add $100 to your required payment every month. This means the payment you make goes down a little every month as your required payment decreases. Either acceleration option produces financial benefits and you can choose the approach that works for you.
Based on your selections, the calculator determines your estimated monthly payment, total interest expense during the interest only period and mortgage balance at the end of the interest only period both with and without mortgage acceleration.
The calculator also shows you the reduction in interest expense and your loan balance at the end of the interest only period when you accelerate your loan. You normally do not reduce your loan balance during the interest only phase. For example, if you take out a $300,000 interest only mortgage, your principal balance at the end of the interest only period is unchanged at $300,000.
But when you accelerate an interest only mortgage the entire amount of your overpayment reduces your principal balance, as demonstrated by our calculator. The lower loan balance allows you to offset the potential increase in your monthly payment and interest rate when the mortgage converts into an amortizing loan and you are required to pay both interest and principal.
The main benefits of applying mortgage acceleration to an interest only mortgage are that you can reduce your required mortgage payment during the interest only period of the loan and also help manage the increase in payment when the loan converts to an amortizing mortgage and the borrower is required to start paying principal. Because your required monthly payment during the interest only period of the loan is based on your outstanding mortgage balance, when you accelerate your loan and reduce your loan balance you also reduce your required monthly payment. The more you accelerate your loan, the lower the required monthly payment. Additionally, if you do not accelerate an interest only mortgage your monthly mortgage payment usually increases significantly when the borrower is required to start paying principal in addition to interest. Applying mortgage acceleration during the interest only period helps to offset the potential jump in payment when the loan amortizes because your new payment is based on a lower mortgage balance.
You should not have to pay any special fees to accelerate an interest only loan. Some banks and companies offer programs that charge borrowers to implement a mortgage acceleration; however, you can accelerate your interest only mortgage for free. Most mortgage acceleration programs offer borrowers little or no value and perform a function that borrowers can do on their own for no cost. Additionally, many companies providing mortgage acceleration programs have engaged in fraud in the past. To implement mortgage acceleration add the amount by which you want to overpay your loan to your mortgage payment and indicate to your lender that the extra funds are applied to your principal mortgage balance. For example, if your required mortgage payment is $1,200, make a payment of $1,500 and let the lender know that the extra $300 goes to paying down your loan balance.
Borrowers can accelerate their mortgage by any amount at any point over the life of their loan. With an interest only mortgage, accelerating your loan during the interest only period provides added benefits but borrowers can continue mortgage acceleration when the loan starts to amortize. Additionally, borrowers can start and stop mortgage acceleration when they want to and adjust the amount by which they overpay their mortgage. For example, borrowers that receive a large annual bonus may decide to make one significant extra payment per year while other borrowers may decide to accelerate their loans monthly or every other month. Borrowers have flexibility to apply mortgage acceleration in the way that best meets their financial priorities.
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Kritt, Erica. “Mortgage Moves: How much can you afford?” CFPB. Consumer Financial Protection Bureau, March 21 2016. Web.