Increasing a mortgage payment by just $100 a month will save many thousands of dollars over the life of a home loan. Image: Flickr/nancyaurora2020 CC-BY-SA

Mortgage acceleration involves increasing the monthly payment to retire the debt sooner and save money on interest. Advocates of mortgage acceleration contend that it is a risk-free investment in future income. Others say the money is better spent on investments with potentially higher returns. The numbers make mortgage acceleration appear to be one of the best long-term investments available.

The principal argument for mortgage acceleration

Because of interest charged over time, the longer it takes to pay off your mortgage, the more expensive the loan becomes. Interest is calculated on the outstanding principal of the loan. Mortgage acceleration reduces the principal faster and limits the lender’s opportunity to collect interest. Some people consider liquidating stock portfolios or diverting payments from tax-deferred IRAs for the purpose of mortgage acceleration. But for most people, the prudent course is to simply add more to the principal payoff each month to generate significant savings on interest and an early exit from the mortgage.

Pay more now to pay yourself even more later

Many people think that home equity just sits there doing nothing. Taking money that could be applied to other long term investments for mortgage acceleration kills potential returns. But even though it impacts short-term cash flow, an investment in mortgage acceleration guarantees to increase cash flow in the longer term — risk free. Another argument against mortgage acceleration is that it eats into the tax deduction on mortgage interest. But the math for mortgage acceleration may still come out ahead. For example, a household with a federal income tax rate of 28 percent plus a state income tax rate of 5 percent is liable for 33 percent of taxable income. If total mortgage interest is $12,000 a year, deducting 33 percent of that liability leaves a net after-tax interest cost of $8,040. However, the household is still on the hook for 67 percent of the interest cost, which gets lower faster with mortgage acceleration.

How mortgage acceleration pays off

Bankrate.com offers an online calculator that shows you how much you can benefit from mortgage acceleration. Using a $165,000 30-year fixed rate mortgage at 7 percent interest with a monthly payment of $1,097.75, total interest charges until the loan is paid off in April 2041 amount to $230, 190. By paying just $100 extra each month, you can save $60,033 in interest, and the loan is paid off in August 2034. Paying an extra $200 a month puts an extra $93,191 in your pocket, and the loan is gone in September 2030. If you can manage to increase the monthly payment by $300, you keep $114,817 and that last payment of $1,397.75 is made in January 2028. Mortgage acceleration is a smarter and safer investment than you can find anywhere else.

Sources

MarketWatch

Minyanville

Bankrate.com