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How to Combine a Refinance with Mortgage Acceleration

How to Combine a Refinance with Mortgage Acceleration

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

    If you are able to lower your mortgage rate and monthly payment by refinancing you can apply mortgage acceleration to save thousands of dollars in interest expense over the life of the loan.  Accelerating your mortgage means paying more than the required monthly payment.  By paying more than the required monthly mortgage payment you pay down your principal loan balance faster and speed up the date when your mortgage is paid in full.  Accelerating your mortgage reduces your loan term by a number of years and saves you thousands of dollars in mortgage payments and interest expense.

    The simplest way to apply mortgage acceleration in combination with a refinance is to continue to make the same, higher monthly payment that you were making prior to refinancing. For example, if your old mortgage payment is $2,000 and your new mortgage payment after refinancing is $1,800, you continue to pay $2,000 even though the required payment is lower. The extra $200 you pay monthly pays down your mortgage balance. In this scenario the payment you make does not change before and after refinancing but you reduce the length of your loan and total interest expense by applying mortgage acceleration.

    Please note that accelerating your mortgage does not require borrowers to pay any extra lender fees and you do not need to pay a company to implement acceleration.  Most mortgage acceleration companies offer little value to borrowers and you can apply acceleration on your own by simply adding money to your monthly payment so that you pay more than the required amount.  Additionally, the amount of overpayment is completely at the borrower's discretion and you can start and stop mortgage acceleration at any point over the life of your mortgage.

  • CalculatorUse our MORTGAGE REFINANCE CALCULATOR to determine how much you can reduce your monthly payment by refinancing
  • The example below demonstrates how to apply mortgage acceleration when you refinance your mortgage.  As illustrated by the example, by simply continuing to make the same payment you made before refinancing, mortgage acceleration combined with refinancing can save your tens of thousands of dollars in interest expense.

  • Example: Combining a Refinance with Mortgage Acceleration
  • The example below compares the monthly mortgage payment, loan term and total interest expense for three cases:

    • Case 1: Original mortgage with 5.0% interest rate, 30 year term and $300,00 loan amount. The borrower does not refinance or apply mortgage acceleration.
    • Case 2: Refinance the original mortgage with the same 30 year term and $300,000 loan amount but at a lower interest rate of 4.0%
    • Case 3: Refinance the original mortgage with the same 30 year term and $300,000 loan amount but a lower 4.0% interest rate AND apply mortgage acceleration.  In this case the borrower continues to make the same monthly mortgage payment that he or she did before refinancing, which is more than the new required payment

    In the example, the borrower is five years into a $300,000, 30 year fixed rate mortgage with an interest rate of 5.0%.  In the refinance only scenario (Case 2) , the borrower saves $178 on his or her monthly payment by refinancing with a lower interest rate but pays $8,000 more in total interest expense over the term of the loan.  The borrower pays thousands more in total interest expense because by refinancing you are effectively extending the length of the original mortgage unless you are able to reduce the term for your new loan.  For example, if you are seven years into a 30 year mortgage and you refinance it with another 30 year loan, it takes you 37 years to pay-off your original mortgage so it essentially becomes a 37 year mortgage.  The longer the mortgage, the more interest expense you pay.

  • CalculatorUse our Mortgage Acceleration Calculator to understand how much you can save by overpaying your loan
  • In Case 3, the borrower combines refinancing with mortgage acceleration and continues to make the same monthly payment he or she made prior to refinancing.  Although the borrower's mortgage payment does not change, paying more than the new required monthly payment reduces the length of the new mortgage by 69 months and saves the borrower $47,000 in interest expense as compared to refinancing and not applying acceleration.  Additionally, combining refinancing with mortgage acceleration saves the borrower $39,000 in total interest expense as compared to keeping the original mortgage and not refinancing -- without increasing the borrower's monthly payment.

  • Great Mortgage IdeaThe example illustrates the significant financial benefits of combining refinancing with mortgage acceleration.  Additionally, the borrower maintains the flexibility to stop accelerating the mortgage and make the lower required monthly payment at any time
  • Original Mortgage

    Amount of Mortgage $300,000
    Term (Years / Months) 30 / 360
    Years into Mortgage 5
    Interest Rate 5.0%
    Required Monthly Payment $1,610
    Total Interest Expense Over the Life of Mortgage $279,600

    Refinance

    Amount of Mortgage $300,000
    Term (Years / Months) 30 / 360
    Interest Rate 4.0%
    Required Monthly Payment $1,432
    Total Interest Expense Over the Life of Mortgage $287,607

    Savings / (Cost) Compared to Not Refinancing

    Monthly Mortgage Payment $178
    Total Interest Expense Over the Life of Mortgage ($8,007)

    Refinance plus FREEandCLEAR Mortgage Acceleration Strategy

    Amount of Mortgage $300,000
    Term (Years / Months) 30 / 360
    Interest Rate 4.0%
    Required Monthly Payment $1,432
    Amount of Monthly Overpayment $178
    Monthly Mortgage Payment Paid by Borrower $1,610
    Reduction in Term Resulting from Overpayment (Months) 69 months
    Total Interest Expense Over the Life of the Mortgage $240,597

    Savings / (Cost) Compared to Not Refinancing

    Monthly Mortgage Payment $0
    Total Interest Expense Over the Life of Mortgage $39,003

    Savings / (Cost) Compared to Refinancing Only

    Monthly Mortgage Payment ($178)
    Total Interest Expense Over the Life of Mortgage $47,010
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  • Sources

    Refinance: http://myhome.freddiemac.com/refinance/no-cash-out.html

About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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