If you want to pay of your mortgage quicker, it can be a good idea to participate in an equity accelerator program, which allows you to build equity in your home and pay off your mortgage quicker, rather than primarily paying down interest to begin with. By participating in an equity accelerator program, typically offered by most banks and mortgage lenders, you can significantly speed up principal reduction.
What Is an Equity Accelerator?
An equity accelerator program is designed as a way of speeding up the principal reduction on your mortgage so that you can more quickly build equity, pay off your loan, and save significant amounts on interest over the life of the loan. Sounds good, right? But how exactly do these programs work to save you money?
Typically, homeowners make one payment per month on their mortgage, and for the first few years, that payment goes directly or primarily toward the accrued interest. With the most common types of equity accelerator programs, you pay every two weeks instead of once a month. Your monthly payment is simply cut in half and charged bi-weekly, so instead of having a monthly mortgage, you have a bi-weekly mortgage.
Equity Accelerator Programs
Bi-Weekly Payments
The most common equity accelerator programs involve making bi-weekly payments instead of making one monthly mortgage payment. This means that you make half of your monthly mortgage payment every two weeks. Since there are 52 weeks in a year, this results in 26 half-payments, which equals 13 full payments annually instead of the usual 12.
Additional Payment
Another option is an additional payment equity accelerator. The extra payment made through this method goes directly toward the principal, reducing the loan balance faster. You can make an extra payment once a year or even more often if you have the finances to do so.
How Does a Mortgage Equity Accelerator Save You Money?
Well, paying every two weeks actually equates to you making the equivalent of 13 monthly payments annually rather than 12. Instead of paying once a month to give you 12 total payments, you pay every two weeks. And since there are 52 weeks in a year, this makes for a total of 26 “half-payments” or 13 “full” payments. This extra payment goes entirely to reducing your principal instead of paying off interest. So, if you decide to sign up for the program, your mortgage company will automatically withdraw your payments from your account on a bi-weekly basis.
How Much Do You Save by Paying Mortgage Bi-weekly?
How much you save by paying your mortgage bi-weekly depends on your interest rate and the size of your loan, but you’ll be shaving years' worth of payments off your loan. As a general rule, if you have a 4% interest rate, you’ll save around $10,000 in interest for each $100,000 you have on your mortgage, so if you took out a $300,000 mortgage, you’d save approximately $30,000 in interest by making bi-weekly mortgage payments.
Equity Accelerator Cost Savings Example
Consider a $300,000 mortgage with a 30-year term at a 4% interest rate.
- Monthly Payment: $1,432.25
- Total Interest Paid Over 30 Years: $215,608.20
Using a bi-weekly payment plan:
- Bi-Weekly Payment: $716.12
- Mortgage Paid Off in: Approximately 25.5 years
- Total Interest Paid Over the Loan Term: $175,689.00
- Total Interest Savings: $39,919.20
Pros of Mortgage Equity Accelerators
Faster Mortgage Payoff
The biggest benefit of equity accelerator programs is that you'll pay off your mortgage faster. By making an extra payment each year, you can significantly shorten the loan term. For example, a 30-year mortgage could be paid off in about 25-26 years.
Interest Savings
You'll also save a lot of money with a mortgage equity accelerator. Paying off the principal faster reduces the amount of interest you pay over the life of the loan, potentially saving thousands of dollars.
Builds Equity Faster
As the principal balance decreases more quickly, you build home equity at an accelerated rate, which can be beneficial if you decide to sell or refinance.
Downsides to Mortgage Equity Accelerator Programs
The biggest turn off? Most companies will charge you a fee to participate in the program. It could cost you between $200 and $300 to sign up, and you may have to pay a monthly handling fee. These various fees can end up meaning you could pay up to 30% of what you are saving just to participate in the first place. In the long run, it may still be worth it, but there are other options that don’t require you to buy into an equity accelerator program.
Mortgage Equity Accelerator vs Doing It Yourself
Generally speaking, it is fairly easy and much cheaper to make principal reduction payments of your own volition. You could simply make an extra payment on your mortgage each year, or you could increase your monthly payment and use the extra money towards your principal. For example, instead of paying $2000 a month for your mortgage, simply up your payment to $2200, and put that extra $200 a month to pay down the principal rather than the interest. It may not seem like much, but over the lifetime of your loan, that little extra payment could go a very long way. That’s $1400 a year, which works out to an additional $14,000 over the next ten years of your loan. Alternatively, you could save that $200 a month and make one $1400 lump sum payment towards your principal at the end of the year.
The advantage of an equity accelerator program is that they will deduct your payments automatically without any hassle, or without you needing to remember to do it yourself. But most banks will have the option for you to set the payments up as a bill pay option, meaning they will deduct the amount and pay your mortgage without the added fees associated with equity acceleration. Just make sure to check that the extra money you are paying is going directly towards the principal. Clearly mark your checks or mortgage coupons to ensure this.
Mortgage Equity Accelerator Bottom Line
An equity accelerator mortgage program can be an effective way to pay off your mortgage faster and save on interest, helping you build equity more quickly. While the structured bi-weekly payments offer convenience and discipline, it's essential to weigh the costs and consider whether you can achieve the same results through self-managed extra payments. Consulting with your lender and carefully evaluating your financial situation can help you decide if this program is the right fit for you.