Mortgage Acceleration

Does applying a mortgage acceleration strategy really make sense? When it comes to home mortgages, there are two schools of thought: those that say that having a mortgage is a good investment, and those that say that you would do better by paying your mortgage off early.

Let’s look at both scenarios.

There are two major arguments favoring the idea that a mortgage is a good investment. The first is that it has tax benefits (mortgage interest can be deducted from your taxes); the second is that since the interest on a mortgage is usually low (around 6% in the last few years), you will benefit by making regular payments and investing your discretionary income (investing it where you can make more than 6%, of course).

Let’s look at those arguments. As far as the mortgage interest being tax deductible, what it really means is that if you pay, let’s say, $10,000 in interest in a given year, you will save $2,700 in taxes (at a 27% bracket; even less money if you are at a lower bracket!). Think about this for a moment. Does it really look like a good investment to you? Paying the bank $10,000 to get back $2,700? I didn’t think so. It makes more sense to pay off the mortgage, and once it’s paid off, you get to KEEP the $10,000 as disposable income. This is where a mortgage acceleration strategy can be applied to save you thousands of dollars.

Now, as far as investing your discretionary income instead of sending additional principal, let me say a few things.

First, you don’t have a 6% mortgage (as in our example). The bank likes to say it gave you a 6% mortgage, but in reality it is more like a 120% mortgage. You will never, ever, see a bank referring to a mortgage as having compound interest. And it does, just like a credit card. So if you have a 6% interest, it would only be 6% if you paid off your mortgage in one year. Which nobody, of course, ever does. A $200,000 loan at 6% interest (fixed rate) paid over 30 years will take $432,677 of your money, $232,677 of which is interest. As you can see, the interest is actually over 100%!

With this in mind, let’s face it, most people, including myself, are not keen investors. Many will have a Mutual Fund or retirement account that they rarely review, and investing does take a lot of planning and research. Without proper planning and research you could be “throwing darts” at your financial future. When you consider this, then paying off your mortgage early does make financial sense.

Let me give you an example: on the $200,000 loan we mentioned above, if you send only $30 a month extra (starting the first month) to be applied towards the principal (just $1 a day, less than a cup of coffee!) it will save you $17,697 in interest, and your loan will be paid off two years earlier! And you only sent in $10,800, making over 160% on your money!

Another thing to consider is this: You should pay off your mortgage so you can own your house out-right. Because if you miss a few payments, then you will find out who the REAL owner is! The fact is, you don’t really own your home until it’s 100% paid off. Most people are not aware that you don’t reach 50% equity until year 21 of a 30 year mortgage! Look at the following chart to see how your equity builds up. You have more than $100,000 in equity at month 252 of 360 (considering no property values increase; only mortgage payoff)

Property Equity

So, if you are ready, let’s explore how you can pay off your home years sooner… and save possibly hundreds of thousands of dollars in interest, money you could use for whatever you want!

Mortgage Acceleration Strategy

How to cut your mortgage in half

Having analyzed the benefits of paying your mortgage off early, lets move on to the mortgage acceleration strategy. But before you start, make sure you follow the information on how to develop a budget.

There are actually several ways to pay off your mortgage early; this is one of them and you can do it on your own. It would help you to get an amortization schedule which you can get from your Loan Officer or Bank, Or use this simple mortgage amortization calculator (click on the image below):

Mortgage AccelerationStrategy, step by step

Now look at the first chart so you can follow the strategy: When you make your January payment for $1,199,10 you also include the portion of the principal for the following month, ($200.10) to be applied towards the principal (make sure you make it clear, otherwise the Bank may apply it to your impound account). What you are actually doing here is you are paying the February payment in full with only $200.10! This way you won’t have to pay interest on those $200.10 when making the February payment. Now in February you still have to send a payment, so you send the March payment (you already paid for February) and also include the $202.10 for the month of April, to be applied, again, towards the principal. So again, you are paying one full month (April) with only $202.10. Your monthly payment is $1,199.10, but by sending $1,401 you are paying 2 months! This is incredibly powerful; you are actually moving through your mortgage twice as fast, and saving an amazing amount of money in interest.

Let’s go through the process, step by step.

1- January 1st, you send $1,199.10 + $200.10 (February’s principal), $1,399.10 total.

You just paid for January and February.

2- February 1st, you send $1,199.10 (for March) + $202.10 (April’s principal), total of $ 1,401.20. You just paid March AND April.

3- March 1st, you send $1,199.10 (for May) + $204.13 (June’s principal), total of $1,403.23. You have just paid May and June. So far, you just paid half a year worth’s of mortgage in only 3 months! See how powerful and simple this is? By paying $606.33 you saved $2,990! This is almost 500% return on your money. And, best of all, this is incredibly fun! Imagine how you will feel by following your amortization schedule and seeing how much money (BIG money) you are saving! And the feeling of being mortgage free is unlike any other; you are in control.

Now, we based this example at the beginning of the mortgage to make it easy for you to understand the process; you need to get an amortization table based on your actual mortgage and follow along based on the month you are in. If you are at month 21, you start there. The sooner you start applying this strategy, the more money you will save. Even if your mortgage is 15 years old you will still be able to save a lot of money and pay it off sooner.

Continue to do this every month, and you will never have to pay interest on the principal that has been pre-paid. Consistently following this strategy will allow you to pay off your 30-year mortgage in 15 years or less, and you will save an unbelievable amount of money in interest. After your mortgage is paid off, you can move up to another house and rent the old one, and that rent money you receive could be paying your new house. After 30 years, you own TWO houses, both paid off, and you only paid for one (the other will be paid for by your tenants!). See now why we stress that paying off your mortgage is a great investment? Follow this mortgage acceleration strategy as soon as possible, you will be so glad you did!

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