Frequently, homeowners don’t realize that for the first few years they are making their monthly mortgage payments, they aren’t actually paying off much of the principal; they are mostly paying off the interest. This can come as a nasty surprise if you go to sell your home, only to find out the final sale price will barely cover your mortgage payoff amount, if it does so at all. Imagine the frustration of paying each month and not reaping the benefits when you sell. Not only that, but the less time you spend paying off a loan, the less interest you accrue, which is all the more reason to pay your mortgage off as quickly as possible.
For these reasons, 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 towards the accrued interest. With the most common types of equity accelerator program, 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.
But if you’re still paying the same amount, how does that 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 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.
Pros of Mortgage Accelerators
Of course, as with most things, there are pros and cons to equity accelerator programs. On the positive side, choosing to participate in an equity accelerator program can reduce the length of time you are paying off your mortgage, sometimes by up to eight years. Meaning that, with a traditional 30-year loan, you would be done paying it off in 22 years. Saving 8 years worth of payments and interest is a winning deal, why wouldn’t you want to participate?
It may seem like there’s no losing side to participation, but, of course, there are some drawbacks to equity accelerator programs.
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.
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.
In general, it’s a clever idea to make extra payments on your mortgage to help you pay it off faster. Not only will you be reducing the principal, but you can save yourself bucket loads of interest by paying off the loan well before the typical 30-year mark. Equity accelerator programs have the right idea, but if you don’t want to spend the money on fees and can stay on top of the payments yourself, there are ways that you can reduce your principal and save by yourself without participating in a program.