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How to Combine a Refinance with Mortgage Acceleration
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 your 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.
Accelerating your mortgage may be easier after you refinance, especially if your monthly payment is lower. If you can continue to make your old monthly payment, you pay off your new mortgage faster which shortens your loan and saves you money. Continue reading to learn how to combine a refinance with mortgage acceleration.
Refinance Your Mortgage
The first step in the process is to refinance your existing mortgage. We only recommend that you refinance if you can reduce your mortgage rate and monthly payment. Refinancing also usually involves closing costs so there are other factors to consider.
If you can lower your interest rate by at least 0.750% then refinancing typically makes financing sense. It is also a good idea to keep your mortgage balance the same or lower, if possible, as this helps keep your monthly payment low.
- Use ourMORTGAGE REFINANCE CALCULATORto determine how much money you can save by refinancing
We also recommend that you not extend the length of your loan significantly when you refinance. For example, if you have 20 years left on your original 30 year mortgage, refinance into a new 20 year loan. This approach reduces your total interest cost over the life of the mortgage, increasing your benefit from refinancing.
The table below shows refinance rates and fees for leading lenders. We recommend that you compare multiple lenders to compare mortgage terms and determine if you should refinance.
Continue Making Your Old Mortgage Payment
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 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 reduces your mortgage balance. In this scenario your mortgage payment does not change before and after you refinance but you reduce the length of your loan and total interest expense by applying acceleration. You can also overpay your loan by more -- say $300 in this example -- which pays off your mortgage faster and saves you more money.
You Should Not Pay Any Extra Fees to Accelerate Your Mortgage
It is important to emphasize 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 third party 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 your discretion and you can start and stop acceleration at any point over the life of your mortgage.
Confirm Your Extra Payment is Applied to Your Account
You can accelerate your loan by adding additional money to your regular monthly payment or by sending extra payments to your lender. If you pay your mortgage by check, be sure to note that the extra payment is applied to your principal balance. If you send a separate payment it is also important to confirm with your lender that the funds are used to reduce your loan balance.
We also recommend that you keep a record of when and how much you accelerate your mortgage. You can use documents such as cancelled checks or bank statements to make sure that your loan balance is accurate. Because most borrowers do not accelerate their mortgages it becomes more important that you confirm extra payments with your lender and keep close track of your account.
Review a Helpful Mortgage Acceleration Example
This example demonstrates how to combine mortgage acceleration with a mortgage refinance. As illustrated by the example, by simply continuing to make the same monthly payment, mortgage acceleration applied with a refinance can save your tens of thousands of dollars in interest expense.
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.
- Use ourMortgage 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.
The 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