SL 5: Three Types of Accelerated Programs
viewing options to accelerate mortgage payments
1) Automatic Draft
Where you send in a lump sum payment on a scheduled bases: illustrated in the previous slide.
You can setup a lump sum automatic draft from your mortgage servicer where you pay a little extra than the minimum monthly amount. Discuss with you lender. Instruct them that the extra lump sum should be applied to reduce your loan amount.
Most lenders offer automated draft of your mortgage payment from your personal money (checking, savings, money market) or investment account. This is the easiest and less costly method to ensure timely payments of you mortgage with an additional lump sum.
2) Accelerated Payments
Some lenders offer the accelerated payment schedule: which allows you to pay half of your monthly mortgage payment every two weeks.
Say your monthly mortgage payment equals $1000. Under the accelerated payment schedule, you will pay $500 every two weeks.
This equals to 26 bimonthly payments, or equivalent to 13 monthly payments instead of the standard 12. You can in effect payoff your 30-year loan in 272 months.
($100,000 / 7.50%APR / 30-Yr / $699.21 Payment)
If you participated under the bi-monthly accelerated program, you will pay $349.60 every two weeks.
You will payoff your mortgage in 23 years and 3 months, saving you about $40,000 in total interest.
Another way to reduce your loan in the same way is to prepay an additional 1/12th of your monthly payment each month.
In the example above, you will add on $58.27 to your monthly payment. You will payoff your mortgage in about 23 years and 3 months, saving you about $40,000 in total interest.
Check with your lender about bi-monthly accelerated program. Or you may discipline yourself and use the prepayment option under one of the payment programs discussed above.
3) Refinance Your Mortgage:
You can payoff your mortgage faster by refinancing at a lower repayment term; i.e., refinance from a 30-year to a 15-year term.
Understand that when you lower the term from a 30-year to a 15-year mortgage plan, your monthly mortgage payment will increase - see sample below.
If you kept your 30-year mortgage and instead made a monthly lump payment equal to the net payment increase, you will get the same payoff benefit.
Of course, lower repayment terms mean lower interest rates, so the benefit will be greater. However, it costs money to refinance your mortgage. Though some lenders offer no-cost refinancing, you will pay a higher rate. So check you numbers.
30 Year Term - 6% APR
Refinancing Terms 30-Yr Term 15-Yr Term Monthly Payment $599.55 $843.86 Net Increase N/A $244.31 Monthly Lump Sum Pay $244.31 N/A Total Interest Saved $63,944 $63,944 Mortgage Payoff Time 15 Years 15 Years