One trick to pay off your mortgage quickly is by paying an extra one-month payment per year. This is either done by paying one lump sum annually, or by splitting a month’s mortgage payment into two and sending payments every other week (biweekly).
This trick is known as accelerated mortgage. Does the borrower really benefit from this type of payment method? If so, what are the advantages that can be gained from an accelerated mortgage?
Faster payment time
If you are carrying a mortgage amortized for 30 years, an accelerated mortgage can help you pay it off at a shorter time, typically five to six years earlier than schedule. The sooner the better, especially when you’re planning to make another important financial investment in the future.
Your lender charges interest on the balance still left on your mortgage account per month. That means, as your balance gets lesser and lesser with each subsequent payment, your interest payments are also reduced. And the sooner you pay off your balance, the more interest savings you’ll have.
Faster building of equity
An extra mortgage payment is slapped to the principal amount of your loan. Why is this important?
It is because most mortgages are typically structured in such a way that the earlier payments are aimed at paying off the interest of the loan. You are only really starting to chip off at the principal after some years. With these extra payments, you can hasten the payment of the property itself, helping you build equity.
The equityis how much a home is valued in the market, minus the remaining loan balance. Essentially, it’s the number representing how much of the property is yours. So the more equity you have, the better. This helps you gain access to interesting refinancingand financing programs should you need them.
Helps you build smart financing habits
With frequent payment schedules, you don’t have a choice but have it structured and planned out else you risk ruining your finances. A structured finance makes for a good habit. When the money is tight? You don’t have to panic, knowing you are ahead of your payments. And, when the loan is completely paid off, you can still stick with the same finance structure – now putting money in an investment account. It can be tough at first, but once you get the hang of it, the habit is hard to break.
No additional costs
Dedication and discipline are main keys to a faster mortgage pay off. Structure your budget and follow them to the book. Stick to your schedule and make it a habit. You do not have to go through agencies to channel your payments; you can accelerate on your own.