by Jennifer LeClaire

What if you could pay off the mortgage on your home or investment property in half the time, save thousands of dollars in interest, and not make a single lifestyle change? You can, with a mortgage acceleration plan. The question is whether you should.

Mortgage acceleration is just another name for making extra principal payments on your mortgage so you can pay the loan off quickly and save on interest costs. Mortgage acceleration has been around as long as there have been mortgages, but formal “programs” didn’t became common until the 1990s.

And in today’s environment of rising foreclosure rates and mortgage defaults, they’re getting a lot of play.

“Put simply, by paying the mortgage down right away versus holding it in a low-yielding savings account, you pay less interest, because your average daily balance is lower,” says Jay Dacey, a mortgage planner in Plymouth, Minn.

Choosing your mortgage acceleration plan

There are three basic avenues for accelerating your mortgage.

NO. 1

The biweekly mortgage. Instead of making one payment each month, you make a payment every two weeks equal to half the monthly payment. However, there are two catches, according to Marc Louargand, president of the American Real Estate Society
and chief investment strategist at Cornerstone Real Estate Advisers in Hartford, Conn.

“The lender is unlikely to accept a partial payment, so the biweekly payments need to be assembled into a monthly payment,” Louargand explains. “The bigger catch here is that there are only 12 months in a year but there are 26 two-week periods. In effect, the plan calls for making 13 full payments each year. By making that one extra payment, you can retire your mortgage two or three years early.”

NO. 2

Pay down principal early. Real estate investors and other homeowners can make extra principal payments at the beginning of the mortgage to shorten the amortization period and save on total interest payments. For example, if you own a rental property and you’re cash flowing more than your mortgage payment, you could put the extra income toward principal.

There are a number of variations on this theme, Louargand notes, but there’s no reason for anyone to pay a fee for this type of advice. A call to your mortgage servicer to confirm its acceptance of additional principal payments is sufficient.

NO. 3

Use a line of credit. This last approach is more complex and active. It goes by various names, but Louargand describes it as a cash flow management program. Typically, you buy a piece of software that manages the relationship between your existing or new mortgage, a new home equity line of credit, and your regular transaction balances.

The basic concept is that your monthly income or cash inflow is deposited as principal payment against your mortgage. Meanwhile, you use the line of credit to pay your regular monthly transactions, such as buying gasoline and groceries. These transactions are effected with a single credit card.

Though the line of credit will likely have a higher interest rate than the primary mortgage, it’s actually cheaper to maintain because of the way the interest is calculated.

“The purported benefit is due to the ‘float’ that comes from using the credit card and the arbitrage between daily interest charges against the credit line and the monthly interest assessment by the mortgage lender,” Louargand says. “This idea requires a fairly high level of discipline on the part of the borrower. It also presumes that the homeowner’s equity is sufficient to make the scheme work. And, in the end, it actually encourages a heavier reliance on credit.”

Source: Growing Wealth

This entry was posted on Monday, June 2nd, 2008 at 12:38 pm and is filed under Owning a Home. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.